Gold retreats on US inflation expectations

Gold prices retreated again on Tuesday, dropping below $1,910 per ounce. Market expectations of a hot US inflation print on Tuesday boosted the dollar, pushing gold prices down. If gold prices increase, resistance may be encountered near $1,953 per ounce, while if gold prices decline, support may be found near $1,885 per ounce.

Gold prices have been predominantly directed by the dollar’s movement, as the competing gold typically loses appeal as an investment when the dollar rises. The dollar firmed on Tuesday, with the dollar index climbing to 104.7 ahead of key US inflation data. US Treasury yields were stable, with the US 10-year bond yielding 4.27%. 

Increases in central banks’ interest rates put pressure on gold prices since assets yielding interest become a more appealing investment compared to gold as interest rates rise. The U.S. Federal Reserve raised interest rates by 25 basis points in July to a target range of 5.25% to 5.50%, the highest level in 22 years. 

The Fed’s aggressively hawkish policy over the past year has been paying off and inflationary pressures in the US are easing. Cooling US inflation rates have shifted market expectations towards a less hawkish direction. Most investors are anticipating a pause in rate hikes, but the US central bank has signaled that further tightening is possible if inflation does not go down consistently. 

US inflation data coming up this week will likely affect the price of the dollar and consequently, gold prices as well. CPI data on the 13th and PPI data on the 14th will provide important information on US inflationary pressures. This week’s inflation data may play a decisive role in future Fed rate decisions.

The US CPI report due on Wednesday is the most highly-anticipated event of the week. Market analysts are expecting an accelerated pace of consumer inflation. Headline inflation is forecast to have risen to 3.6% year-on-year in August from 3.2% in July. If Wednesday’s inflation print comes out as hot, or hotter, than anticipated, gold prices may retreat even further. Increasing price pressures may push the Fed to continue its hawkish policy until inflation drops closer to the Fed’s 2% target.

TRADE GOLD

The content provided in this material and/or any other material that this content is referred to, whether it comes from a third party or not, is for information purposes only and shall not be considered as a recommendation and/or investment advice and/or investment research and/or suggestions for performing any actions with financial products or instruments, or to participate in any particular trading strategy and cannot guarantee any profits. Past performance does not constitute a reliable indicator of future results. TopFX does not represent that the material provided here is accurate, current, or complete and therefore shouldn't be relied upon as such. This material does not take into account the reader's financial situation or investment objectives. We advise any readers of this content to seek their own advice. Without the approval of TopFX, no reproduction or redistribution of the information provided herein is permitted.

Written by:
Myrsini Giannouli

Share the article: