Gold sticks to $1,910 support as slightly hot CPI fails to feed hawkish Fed bets

Gold price trades directionless as investors shift focus to US inflation data.
Investors worry that upside risks to headline CPI could elevate the likelihood of a final interest rate hike from the Fed.
The US economy may avoid recession but higher interest rates could dampen economic prospects.

Gold price (XAU/USD) faces fresh selling pressure as the US Bureau of Labor Statistics reported a slightly hotter-than-anticipated Consumer Price Index (CPI) report for August. US headline inflation expanded at a 0.6% pace as anticipated by market participants. Core CPI that excludes volatile oil and food prices expanded by 0.3%, higher than estimates and July's reading of 0.2%. The US headline CPI, on an annual basis, accelerated to 3.6% from expectations of 3.6% and the prior release of 3.2%. Core CPI matched expectations of 4.3% in a similar period, remaining below the former reading of 4.7%.

Market participants worry that upside risks to headline inflation could elevate the likelihood of a final interest rate hike from the Federal Reserve (Fed) in the rest of the year. The US economy is expected to face the wrath of strict monetary policy as the Fed is widely expected to keep interest rates higher for a longer period. US labor growth is stable but could come under pressure as firms are focusing on achieving efficiency by controlling costs. Apart from the inflation data, the Gold price would demonstrate a power-pack action after the interest rate decision by the European Central Bank (ECB) on Thursday.

Daily Digest Market Movers: Gold price remains under pressure due to stubborn inflation

Gold price tests territory below the crucial support of $1,910.00 as US inflation data for August turned out stickier than anticipated.
US headline CPI, on an annual basis, rose to 3.7% vs. expectations of 3.6% and July’s reading of 3.2%. Core CPI, which strips off volatile food and energy prices, decelerated to 4.3% as anticipated against 4.7% recorded a month ago.
Monthly headline and core inflation expanded by 0.6% and 0.3%, respectively. A strong rebound in gasoline prices has triggered upside risks to headline inflation. Global Oil prices have rallied as much as 40% from May as OPEC sees rising demand for oil in the coming months.
Generally, markets majorly focus on core inflation. Still, Federal Reserve policymakers would not ignore a rebound in headline CPI as it would impact the real income of households and may propel prices of goods and services at factory gates.
Discussions about one more interest rate increase in the rest of the year could accelerate if higher energy prices increase pain for households.
However, the softening of core inflation beyond expectations could encourage the Fed to announce a pause to the historically aggressive rate-tightening spell.
As per the CME Group Fedwatch Tool, traders see a 93% chance for interest rates to remain unchanged at 5.25%-5.50% in September. For the rest of the year, traders anticipate almost a 55% chance for the Fed to keep the monetary policy unchanged.
Investors remain worried about US equities due to the upside risks of higher interest rates to corporate performance, triggering a risk-off profile.
Meanwhile, Goldman Sachs CEO David Solomon said on Tuesday that the US economy is likely to avoid a significant recession, but warned that inflation would be more persistent than market participants currently expect, as reported by Reuters.
The likelihood of a soft landing is high as inflation is coming down while the labor market is stable. However, inflationary pressures in excess of the desired rate of 2% would be the hardest nut to crack.
The US Dollar Index (DXY) sees less volatility above the immediate support of 104.40 ahead of the inflation data. Meanwhile, 10-year US Treasury yields rose sharply to 4.3%.
US consumer inflation data will be followed by Producer Price Index (PPI) and Retail Sales data, which are scheduled for Thursday.
Gold price is expected to deliver a power-pack action after the announcement of the interest rate decision by the European Central Bank (ECB) on Thursday. The ECB is widely expected to keep the main refinancing operations rate at 4.25% due to easing price pressures and rising risks of an economic slowdown.

Technical Analysis: Gold price delivers wild moves around $1,910

Gold price trades back and forth above the round-level support of $1,900.00 as investors remain sidelined ahead of the inflation data. The precious metal auctions inside the previous day’s range, demonstrate a sheer contraction in volatility. The yellow metal continues to find support from the 200-day Exponential Moving Average (EMA), which trades around $1,910.00, while the 20-day EMA around $1,921.00 continues to act as a barricade for Gold price.

Fed FAQs

What does the Federal Reserve do, how does it impact the US Dollar?

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money.
When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

How often does the Fed hold monetary policy meetings?

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions.
The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

What is Quantitative Easing (QE) and how does it impact USD?

In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system.
It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

What is Quantitative Tightening (QT) and how does it impact the US Dollar?

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.

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