Gold is back on the bids and looks to regain the $4,400 level in Wednesday’s Asian trading, having found buyers near the $4,350 region. All eyes remain on the high-impact US Consumer Price Index (CPI) data, which could determine if Gold stretches higher or corrects sharply.
Gold’s fate hinges on the US CPI inflation report
Gold has regained its upside momentum, following a brief profit-taking pullback from the ten-week high of $4,435 reached on Tuesday.
Nothing appears to have changed in the fundamental backdrop as the deadlock between the United States (US) and Iran over the talks on the reopening of the Strait of Hormuz and the US and Yemen’s Iran-aligned Houthis’ separate attacks on shipping continues to keep Oil prices and inflation concerns elevated.
However, that fails to deter Gold bulls, as they remain hopeful of another benign inflation report from the US, following the weak Nonfarm Payrolls print for July, which helped markets dial down expectations on a US Federal Reserve (Fed) interest rate hike in September.
At the press time, the odds of a September Fed rate hike stand at a coin-toss level, according to the CME Group’s FedWatch Tool, shifting the focus back to the US CPI data release, particularly the core inflation readings, as they are shielded from the war-driven energy swings.
The annual core CPI is seen rising by 2.5% in July, slowing from a 2.6% increase in June. Meanwhile, core CPI inflation is expected to climb to 0.2% month-over-month (MoM) in July, following a flat reading in June.
Gold faces two-way risks ahead of the US inflation showdown, with hotter-than-expected core CPI readings likely to ramp up bets on a September Fed rate hike, boosting the US Dollar (USD) and US Treasury bond yields at the expense of the non-yielding Gold.
On the other hand, softer core prints could provide fresh legs to the bullion’s uptrend, as the data would further reduce bets on Fed rate hikes this year and fuel a USD downtrend.
However, the geopolitical risk premium will continue to remain in play and could leave Gold’s initial reaction to the CPI release short-lived.
Gold holds firm as stagflation narrative supports CTA length
According to TD Securities, “precious metals maintain a bid,” with the yellow metal “holding gains, and maintaining CTA length north of $4,400/oz, even as oil prices and rates continue to churn higher.” The firm notes that “recent price action continues to hint at a growing stagflationary theme in the gold market,” adding that while “inflation data and Fed pricing will remain keenly watched, a stronger-than-expected inflation print may be needed to shake the current narrative.”
Gold price technical analysis: Daily chart
In the daily chart, XAU/USD trades at $4,398.04. The metal holds a bullish near-term bias as the spot price remains above the 21-day, 50-day and 100-day simple moving averages (SMAs), with the latter providing nearby trend support around $4,388.40. The 200-day SMA at $4,500.55 looms as the next major upside barrier, while the Relative Strength Index (14) at 67.03 approaches overbought territory, hinting that the latest advance could be losing momentum as it nears that longer-term hurdle.
On the downside, immediate support is seen at the $4,398.04 area, followed closely by the 100-day SMA at $4,388.40, forming a shallow demand cluster before deeper support emerges at the 50-day SMA near $4,147.80 and the 21-day SMA around $4,133.91. On the topside, a decisive break above the 200-day SMA at $4,500.55 would open the door for a continuation of the broader bullish trend, while failure to clear this level would keep gold confined to a consolidative phase above its short- and medium-term averages.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
Economic Indicator
Consumer Price Index ex Food & Energy (MoM)
Inflationary or deflationary tendencies are measured by periodically summing the prices of a basket of representative goods and services and presenting the data as the Consumer Price Index (CPI). CPI data is compiled on a monthly basis and released by the US Department of Labor Statistics. The MoM print compares the prices of goods in the reference month to the previous month.The CPI Ex Food & Energy excludes the so-called more volatile food and energy components to give a more accurate measurement of price pressures. Generally speaking, a high reading is seen as bullish for the US Dollar (USD), while a low reading is seen as bearish.
Inflation FAQs
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%.
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.
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.
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.
