Gold rallies back inside former range, unaffected by US inflation data

• Gold continues to recover, shrugging off mixed US PPI inflation data on Friday. 
• Despite higher inflation data suggesting interest rates might remain high, weak US jobs data indicates the opposite.
• Technically, XAU/USD returns to its range-bound mode as it unfolds a leg back higher. 

Gold (XAU/USD) extends its rally, trading in the $2,640s on Friday, after the release of US "factory gate" inflation or Producer Price Index (PPI) data, 

The data showed US “factory gate” prices rose in September compared to a year ago but showed no-change in prices compared to the previous month. 

The US headline PPI rose 1.8% YoY in September, which was higher than the 1.7% registered in August, and beat estimates of 1.6%, data from the US Bureau of Labor Statistics (BLS) showed on Friday.  

The PPI ex Food and Energy rose by 2.8% YoY in September, which was higher than the 2.4% in August and beat expectations of 2.7%. 

These gains, however, were not reflected in the monthly data which showed headline PPI rising 0.0% compared to 0.2% in August and below the 0.1% forecast. 

For core PPI the monthly data showed a slower 0.2% in September compared to 0.3% in August which was in line with expectations. 

PPI figures are sometimes taken as a precursor of consumer prices since higher production prices are usually passed to consumers in the form of dearer shop prices. 

The mixed data seemed to have little impact on Gold prices which continued trading in the $2,640s after the release.  

Gold rallies after US jobs data

Gold rebounded from just above the key $2,600 psychological level on Thursday after the release of official US Jobless Claims data showed a surprising spike in the number of people claiming unemployment benefits. US Treasury yields dipped after the release, the US Dollar (USD) marginally weakened and Gold got a lift.

US Initial Jobless Claims in the week ending October 4 rose by 258K, above the 225K of the previous week and expectations of 230K, data from the US Bureau of Labor Statistics (BLS) showed. The rise in initial claims was well above the average, although this might have been caused by the exodus from Florida ahead of the impact of Hurricane Milton, according to Bloomberg News. 

Continuing Claims for the week ending September 27 rose to 1.861 million, higher than the revised-down 1.819M  of the previous week and roundly above the 1.830M estimate. 

Overall, the data showed weakness creeping into the jobs market, which is likely to keep the Fed on track to cut interest rates (in order to stimulate borrowing and job creation) at its November policy meeting. In August, Fed Chairman Jerome Powell signaled he was shifting his focus from inflation to the Fed’s other mandate: “full employment”.  

Although the market-based probability of the Fed lowering its fed funds rate by 50 basis points (bps) (0.50%) remained at zero after the release, the chances of a smaller 25 bps (0.25%) cut rose to 89% from 85% before the jobs’ data, according to the CME Fedwatch tool. The probability of the Fed leaving its key interest rate unchanged in November fell to 11% from 15%. These probabilities have since reverted to 85% for 25 bps and 15% for no-change.

Higher-than-expected inflation data, as measured by the Consumer Price Index (CPI) for September, released at the same time as the Jobless Claims’ data, failed to act as a counter-weight.  Headline CPI climbed 2.4% year-over-year (YoY) from 2.3% previously, and core CPI rose 3.3% YoY from 3.2% previously. The higher inflation would normally be expected to increase bets of the Fed keeping interest rates unchanged to continue the fight against stubbornly high inflation, however, this was not the case on Thursday. This was probably due to the Fed’s new prioritization of employment. 

Gold has recently gained a further backdraught from the speeches of Fed policymakers.  A long list of officials commented on the outlook for monetary policy on Wednesday, and all were assessed as either neutral or dovish according to the FXStreet FedTracker, a new AI-powered tool that gauges the tone of Fed officials’ speeches on a dovish-to-hawkish scale from 0 to 10. 

Gold could also be gaining due to attracting safe-haven flows amid elevated geopolitical tensions. Israel has stepped up its bombing of Hezbollah targets in Lebanon, causing substantial collateral damage, and investors remain on tenterhooks about the scale of Israel’s almost certain retaliation against Iran. 

Technical Analysis: Gold returns to familiar range

Gold flips its short-term downtrend and rises back up into its familiar range above $2,625 after bottoming out at the $2,600 psychological level. 

XAU/USD 4-hour Chart

 

The short-term trend has probably switched back to sideways, and given the technical analysis principle that “the trend is your friend,” the odds favor a continuation in the near term. This will likely see Gold continue its up-leg towards the old range ceiling at $2,670. A break above $2,653 (October 8 high) would provide more confirmation such a leg was evolving. Following that, Gold might unfold a leg back down to the range floor as it continues oscillating. 

Gold’s medium and long-term trends remain bullish, however, and if one of these longer-term cycles resumes, it could, in theory, push the asset to even higher highs.