Gold rises after US CPI data shows a further cooling in inflation

• Gold rises after US Consumer Price Index data for June comes out cooler than expected. 
• The data indiactes there is a high probability of a rate cut in September – a positive for Gold. 
• Gold makes further gains after Powell sets a cautiously optimistic tone in testimony to lawmakers in Washington.

Gold (XAU/USD) trades above $2,400s on Thursday after the release of US Consumer Price Index (CPI) data for June shows price pressures cooling. The lower-than-expected CPI data makes it more likely the Federal Reserve (Fed) will see fit to cut interest rates in the near term, which is positive for Gold since lower interest rates reduce the opportunity cost of holding the non-interest bearing asset. 

Gold is also benefiting from further emerging data showing that central banks are continuing to hoard all over the world. This comes despite the news on Sunday that the largest consumer of Gold, the People’s Bank of China (PBoC), stopped buying the precious metal for the second month running in June, following an 18-month buying bonanza.

Gold surges higher after US CPI release

Gold drives higher on Thursday after the release of US CPI data paints a picture of a cooling economy, suggesting interest rates in the US will fall, which in the process will make Gold a more attractive investment. 

US CPI rose 3.0% year-on-year in June, falling below estimates of 3.1% and the previous month's 3.3%. CPI declined 0.1% on a month-over-month basis in June, when economists had expected a 0.1% rise from 0.0% in May, according to data from the US Bureau of Labor Statistics.  

Core CPI, which excludes volatile food and energy components, meanwhile cooled to 3.3%, falling below expectations of 3.4% from 3.4% previously. On a monthly basis core CPI rose 0.1%, which was below the 0.2% forecast and 0.2% of May.  

The data is further evidence that inflation is falling to the Fed's target of 2.0% and makes it more likely the central bank will begin cutting interest rates – a positive development for Gold. 

Gold rises as Powell steers middle-way, markets see cuts coming 

Gold gained on Wednesday after markets assessed Fed Chairman Jerome Powell as cautiously optimistic in his second day of testimony to US lawmakers in Washington. 

In comments to the House Financial Services Committee Powell said that “We see current Fed policy as restrictive," indicating that at their current level, interest rates were successfully doing the job of bringing inflation back down to the Fed’s 2.0% target. 

When asked about the timing of future Fed interest-rate cuts and whether he would wait for the Fed’s preferred gauge of inflation, the Personal Consumption Expenditures (PCE) Price Index, to fall below the Fed’s target before pulling the trigger, Powell said that he would not, because, “inflation has a certain momentum,” and “you don’t want to wait until inflation gets all the way down to 2.0%.” At its last reading, both headline and core PCE fell to 2.6%, suggesting the Fed might not be that far away from making rate cuts.

This reinforced current market-based barometers of when the Fed will cut interest rates. The CME FedWatch tool continues to see a high 70% probability of a 0.25% cut in the Fed Funds rate – the Fed’s primary policy interest rate – in September. Such a cut would bring the policy rate down to an upper bound of 5.25%. The CME FedWatch tool bases its probability on the price of 30-day Fed Funds futures prices.  

Although investors had been hoping for more concrete details of when the Fed would cut interest rates, Powell’s overall optimism about achieving a “soft-landing” for the economy – when inflation falls back to target without unemployment rising too high – buoyed sentiment. That said, Friday’s official jobs report, the Nonfarm Payrolls release, reported the US Unemployment Rate rising to 4.1% from 4.0%, when no rise had been expected. It was the third month of increase in a row. 

Gold buoyed by central bank buying

Gold makes further gains on Thursday due to the emergence of data showing central banks around the world are still hoarding Gold despite the news that the largest consumer, the People’s Bank of China (PBoC), has ceased Gold purchases for two months running in June. 

Despite the PBoC’s absence from the market, which accounts for over a quarter of buying, the Bank of India (BOI) bought nine tons of Gold in June, the National Bank of Poland four tons, and the Czech National Bank two tons, according to TD Securities. 

Analysts at Citibank remain optimistic about central-bank demand, which they see rising in the second half of the year to reach a total of around 1,100 tons in 2024, a 5.8% increase from the previous year. They put the gains down to an increasing likelihood of trade wars and concerns about US fiscal policies. 

To that end, Citibank’s official forecast is for Gold to hit $2,600 by the end of 2024. 

Meanwhile, Bert Melek, Head of Commodity Strategy at TD Securities, forecasts Gold to hit $2,475 in Q1 of 2025.

Technical Analysis: Gold rising for third day in a row

Gold makes gains for the third day in a row following the formation of a bearish Two-Bar reversal pattern (green-shaded rectangle in the chart below) at the top of the early July up move. This pattern forms after a long green-up day is followed by a long red-down day of a similar length and size. It can be a sign of a short-term reversal. In the case of Gold this has not played out.

XAU/USD Daily Chart

The outlook is unclear. There is still a risk Gold could pull back to the 50-day Simple Moving Average (SMA) at $2,344, fulfilling the negative implications of the Two-Bar pattern. At the same time, the recovery after its formation has partially invalidated it and suggests the price could go higher.

A break above the high of the pattern and Friday’s peak at $2,393 would provide strong bullish confirmation of a continuation higher. This would probably also unlock the next target at the $2,451 all-time high. 

The bearish Head & Shoulders (H&S) topping pattern that formed from April to June has been invalidated by the recent recovery. However, there is still a chance – albeit much reduced – that a more complex topping pattern may have formed instead. 

If a complex pattern has formed in place of the H&S, and the price breaks below the pattern’s neckline at $2,279, a reversal lower may still be possible with a conservative target at $2,171, the 0.618 ratio of the height of the pattern extrapolated lower. 

The trend is now sideways in both the short and medium term. In the long term, Gold remains in an uptrend.