Gold rally continues on soft US inflation

Gold prices extended gains on Wednesday, rising from $2,677 to $2.696 per ounce. If gold prices rise, they may encounter resistance at $2,700 per ounce, while if gold prices decline, support may be encountered near $2,640 per ounce. 

Gold prices are driven by opposing forces. Increased safe-haven demand due to geopolitical tensions is driving gold prices up. In addition, the recent uncertainty surrounding President-elect Donald Trump’s proposed trade tariffs is driving investors towards safe assets. On the other hand, however, the Fed’s recent hawkish shift is putting pressure on gold prices. 

US inflation data this week came in lower than anticipated, indicating that disinflation in the US is progressing, which may affect the Fed’s rate outlook. After the release of lower-than-expected PPI data on Tuesday, soft Consumer Price Index (CPI) data on Wednesday boosted gold prices. Headline inflation rose by 2.9% year-on-year in December from 2.7% in November, which aligned with expectations. As expected, monthly inflation rose by 0.4% in December against 0.3% in November. Core CPI, however, which excludes food and energy, rose by just 0.2% in December following a 0.3% rise in November and against expectations of a 0.3% print. Core CPI rose 3.2% year-on-year in December, below estimates for a 3.3% increase and November’s 3.3% gain. 

Producer Price Index (PPI) data on Tuesday surprised on the downside, indicating that US inflation is easing, boosting gold prices. PPI rose by 0.2%, in December, falling short of expectations of a 0.4% print and following a rise of 0.4% in November. Core PPI, which excludes food and energy, came in flat against expectations of a 0.2% rise and following a rise of 0.2% in November. PPI climbed 3.3% year-on-year in December, falling below expectations of 3.4% but rising above November's 3.0% print. Core PPI came in at 3.5% annually, falling short of expectations of a 3.8% print but above November’s reading of 3.4%.

Gold prices have been typically directed by the dollar’s movement, as the competing gold typically loses appeal as an investment when the dollar rises. The dollar edged lower on Wednesday and the dollar index dropped from 109.2 to 109.1 after the release of the US inflation report. US treasury yields dipped, putting pressure on the dollar, with the US 10-year bond yield dropping from 4.80% to 4.66%.

Last week, conflicting reports on US President-elect Donald Trump’s future economic measures caused turmoil in markets. The uncertainty surrounding Trump’s proposed tariffs boosted gold prices, as Trump’s risky economic plans raised the demand for safe-haven assets. 

Trump will take office next week on January 20 and his proposed tariffs could potentially ignite trade wars. In addition, Tramp’s plans may reignite inflationary pressures. Concerns that global inflation may rise are propping up gold prices. 

Gold prices are under pressure by decreased Fed rate cut expectations. The US Federal Reserve cut interest rates by 25 basis points at its latest meeting to a target range of 4.25% to 4.50%. Fed Chair Jerome Powell delivered a hawkish speech after the meeting, emphasizing the need to be cautious about further rate cuts. Powell stated that the Fed’s approach will remain data-driven and hinted that the pace of future rate cuts will be slower. 

Safe-haven demand remains high, due to uncertainty in the Middle East, boosting gold prices. Tensions between Israel and Lebanon have cooled after the ceasefire deal, but hostilities between Israel and Hamas continue in the Gaza area. Meanwhile, the situation between Russia and Ukraine remains critical.

This week important US economic data releases are likely to cause volatility in gold prices. US inflation data in particular are likely to affect the Fed’s rate outlook and are eagerly awaited by traders. Producer Price Index (PPI) data is due on Tuesday, and more importantly Consumer Price Index (CPI) data on Wednesday will show if inflationary pressures in the US remain high. Wednesday’s inflation report is expected to show that headline inflation rose by 2.9% year-on-year in December from 2.7% in November, indicating that the progress of disinflation is slow.

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: