Gold rallies as stubborn inflation risks fade, US Dollar remains subdued

Gold recovers sharply as the Fed is expected to pause the policy-tightening spell.
The US Dollar comes under pressure after refreshing a six-month high as fears of a global slowdown recede.
US Retail Sales increased sharply in August as service stations received higher revenue due to rising gasoline prices.

Gold price (XAU/USD) recovers strongly as investors see no more interest rate increases from the Federal Reserve (Fed) for the remainder of 2023. The Fed seems to be done with its historically aggressive interest rate hiking cycle in the absence of economic indicators that support further upside risks to inflation. The recovery move in the precious metal is also backed by a correction in the US Dollar after China’s Retail Sales and Industrial Production were robust in August.

Meanwhile, US Retail Sales rose sharply in August as service stations received higher revenue due to rising gasoline prices. The impact of the higher energy prices is expected to remain limited on the overall Consumer Price Index (CPI), something that should encourage Fed policymakers to keep interest rates unchanged next week.

Daily Digest Market Movers: Gold price rebounds as inflation risks fade

Gold price extends its recovery to near $1,920.00 from around $1,900.00 as investors hope that the Federal Reserve is done with hiking interest rates for 2023.
The precious metal recovered strongly as soaring expectations of no more interest rate increases from the Fed triggered some profit-booking in the US Dollar.
A big chunk of US economic data for August suggests that upside risks to inflation are receding, adding to the thesis that Fed policymakers could discuss more about keeping interest rates ‘’higher for longer” and less about additional increases.
On Thursday, the US Census Bureau reported that monthly Retail Sales expanded at a higher pace of 0.6% in August compared with July’s reading of 0.5%. Investors anticipated a slower growth pace of 0.2%.
A major contributor to higher consumer spending came from strong gasoline prices, which have increased due to the global rally in Oil prices.
The headline Producer Price Index (PPI) in the US rose 0.7% on a monthly basis, higher than the 0.4% increase expected and also July’s print. Annual headline PPI accelerated to 1.6% against estimates of 1.2% and the former reading of 0.8%.
Overall energy prices that include components like gasoline, electricity, and utility gas prices spiked 5.6% in August compared with the previous month due to the global oil rally that pushed headline PPI higher at a stronger pace.
US President Joe Biden vowed to cut gasoline prices after the US Retail Sales report showed that higher prices boosted revenue at service stations. Gasoline prices jumped 10.6% in August after climbing 0.2% in July.
Meanwhile, the annual Core PPI decelerated to 2.2% from July’s 2.4%, as expected by market participants.
Investors see the Fed pausing the policy tightening spell in its September monetary policy as the impact of higher energy prices on overall headline inflation looks limited. Generally, Fed policymakers consider the core CPI for the monetary policy decision, which is expected to continue to fall.
As per the CME Group Fedwatch Tool, traders see a 97% chance for interest rates to remain steady at 5.25%-5.50% after the September 20 Federal Open Market Committee (FOMC) meeting. For the rest of the year, traders anticipate almost a 60% chance for the Fed to keep monetary policy unchanged. This marks an increase from the 54% before the release of PPI and Retail Sales data release.
On Thursday, the US Department of Labor reported that Initial Jobless Claims for the week ending September 8 were higher than in the prior week, breaking a streak of five straight weeks of declines. Individuals claiming jobless benefits for the first time rose by 220K, while investors anticipated claims at 225K. In the prior week, jobless claims were at 216K.
The US Dollar faces some selling pressure as fears of a global economic downturn ease after the release of upbeat Industrial Production and Retail Sales data from China.

Technical Analysis: Gold price climbs above 20-EMA

Gold price extends its sharp recovery to near $1,930.00 as the declining momentum appears to have exhausted after the selling pressure dried. The asset delivers a breakout of the Bearish Wedge chart pattern formed on a lower time frame, which triggered a bullish reversal. The precious metal found decent buying interest near the 200-day Exponential Moving Average (EMA) at $1,900.00 and has recovered above the 20-day EMA, which trades near $1,920.00.

Inflation FAQs

What is inflation?

Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.

What is the Consumer Price Index (CPI)?

The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.

What is the impact of inflation on foreign exchange?

Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.

How does inflation influence the price of Gold?

Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it.
Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.

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