Gold lacks firm near-term direction as traders await US inflation figures this week

Gold price edges lower as USD benefits from reduced expectations of a 50 bps Fed rate cut.
The downside remains limited as traders look to US inflation numbers for a fresh impetus.
The technical setup supports prospects for a breakout through a short-term trading range.

Gold price (XAU/USD) struggles to capitalize on the previous day's bounce from the $2,485 support zone and attracts some sellers on Tuesday. The commodity, however, manages to hold above the $2,500 psychological mark through the early part of the European session as traders seem reluctant to place directional bets ahead of the US inflation figures this week. The crucial US Consumer Price Index (CPI) is due for release on Wednesday, which will be followed by the Producer Price Index (PPI) on Thursday. The data should influence market expectations about the size of the Federal Reserve's (Fed) rate cut later this month and provide a fresh directional impetus to the non-yielding yellow metal.

Heading into the key data risk, the US Dollar (USD) climbs back closer to the monthly peak touched last week amid reduced bets for a larger Fed rate cut move in September. This, along with a stable performance around the global equity markets, is seen undermining the safe-haven Gold price. Despite the downtick, the XAU/USD remains confined in a familiar range held over the past three weeks or so, which points to indecision among traders over the near-term trajectory. This further makes it prudent to wait for strong follow-through selling before positioning for an extension of the recent pullback from the vicinity of the all-time peak tested following the release of the mixed US jobs report last Friday.

Daily Digest Market Movers: Gold price traders seem non-committed ahead of crucial US inflation data this week

Friday's mixed US employment data reduced the likelihood of a 50-basis point rate cut by the Federal Reserve and continues to benefit the US Dollar, acting as a headwind for the Gold price.
According to the CME Group's FedWatch tool, traders see a 71% chance of a 25-basis-points rate cut at the next FOMC meeting on September 17-18 and a 29% chance of a 50-bp reduction.
Investors opt to wait for the release of the August US consumer price data on Wednesday, which, along with the Producer Price Index on Thursday, could influence Fed rate cut expectations.
New York Fed President John Williams said on Friday that inflation expectations remain well anchored and that monetary policy can be moved to a more neutral stance depending on data.
Separately, Fed Governor Christopher Waller noted that maintaining the economy's forward momentum means the time has come to begin reducing rates and that he is open-minded on the size.
Adding to this, Chicago Fed President Austan Goolsbee said that officials are finally beginning to catch up with the broader market's view that the time has come for a move on policy rates.
This suggests that the path of least resistance for the non-yielding XAU/USD remains to the upside and the immediate market reaction to stronger US inflation numbers is more likely to be limited.
Official data published this Tuesday showed that China's trade surplus widened from CNY601.98 billion to CNY649.34 billion in August, led by an 8.4% jump in exports and weak import figures.

Technical Outlook: Gold price needs to breakout through $2,530-2,532 hurdle for bulls to regain near-term control

From a technical perspective, the range-bound price action witnessed over the past three weeks or so constitutes the formation of a rectangle on the daily chart. Against the backdrop of the recent rally to the all-time peak, this might still be categorized as a bullish consolidation phase. Moreover, oscillators on the daily chart are holding in the positive territory, validating the near-term positive outlook for the Gold price. That said, it will still be prudent to wait for a sustained breakout through the trading range resistance, or the all-time peak around the $2.530-2,532 region, before positioning for any further appreciating move.

On the flip side, any meaningful slide is likely to find some support near the $2,485 area ahead of the $2,470 horizontal zone. The latter represents the lower boundary of the aforementioned trading range, which if broken decisively might prompt some technical selling and pave the way for deeper losses. The Gold price might then accelerate the fall towards the 50-day Simple Moving Average (SMA) support, currently pegged near the $2,446 area, before eventually dropping to the $2,410-2,400 region.

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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