Gold weakens on hotter-than-expected US inflation

Gold prices edged lower on Wednesday, dropping below $1,908 per ounce on hotter than expected US inflation print. If gold prices increase, resistance may be encountered near $1,953 per ounce, while if gold prices decline, support may be found near $1,900 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 gained strength on Wednesday, boosted by a hot US inflation print, with the dollar index climbing to 104.8. US Treasury yields were stable, with the US 10-year bond yield rising above 4.3%.  

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 this week will likely affect the price of the dollar and consequently, gold prices as well. Sticky US inflation provided support for the dollar on Wednesday putting pressure on gold prices. Consumer inflation is accelerating, with CPI rising by 0.3% in August from 0.2% in July against expectations of a 0.2% print. Headline inflation came in hotter than anticipated, climbing to 3.7% year-on-year in August from 3.2% in July versus 3.6% anticipated. Core inflation, which excludes food and energy, also rose by 0.3% in August from 0.2% in July. Increasing price pressures may push the Fed to continue its hawkish policy until inflation drops closer to the Fed’s 2% target.

US PPI data on the 14th will provide a more complete picture of the broader trend in inflationary pressures and are expected to cause volatility in dollar prices.

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Written by:
Myrsini Giannouli

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