Gold rally halted by hot US inflation print

Gold prices were volatile this week, after rising to an all-time high of 2,190 per ounce last week. Gold prices slipped to 2,160 per ounce on Thursday as the US dollar and treasury yields rallied. If gold prices increase, resistance may be encountered at the psychological level of $2,200 per ounce, while if gold prices decline, support may be encountered near $2,080 per ounce. 

Gold prices have experienced a meteoric rise in the past two weeks and are currently trading in overbought territory. The dollar’s decline, combined with the rise in demand for safe-haven assets due to the war in Gaza, propelled gold prices upward. 

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 surged on Thursday, with the index climbing to 103.4. US treasury yields also strengthened, with the US 10-year bond yielding approximately 4.29%.  

US fundamentals influence gold prices. US inflation data this week surprised on the upside, boosting the dollar, and putting pressure on gold prices. PPI data released on Thursday showed that price pressures in the US remain sticky and may derail the Fed’s plans of lowering interest rates. PPI rose by 0.6% in February against 0.3% anticipated and a 0.3% print in January. Core PPI, which excludes food and energy, also exceeded expectations, rising by 0.3% versus the 0.2% anticipated, registering a lower monthly growth than January’s 0.5%, though. 

The highly anticipated US CPI data on Tuesday showed an uptick in US inflation in February. February’s inflation was hotter than anticipated and may set back the Fed’s plans to reduce interest rates. US Headline inflation rose by 3.2% year-on-year in February from a 3.1% print in January and against expectations of a steady print of 3.1%%. Monthly CPI rose by 0.4% in February, exceeding expectations of 0.3% growth. Core CPI, which excludes food and energy, also rose by 0.4% against the 0.3% raise anticipated. 

The Fed kept interest rates unchanged at its latest monetary policy meeting within a target range of 5.25% to 5.50%. The Fed, however, has removed the tightening bias from its policy statement, indicating that the central bank is preparing to pivot to a less restrictive monetary policy, boosting gold prices.

Fed rate cut expectations are affecting gold prices. Market expectations of early Fed rate cuts dropped on Tuesday, putting pressure on gold prices, as US inflation surprised on the upside. Fed rate cut odds in June rose again on Wednesday, however, boosting gold prices, as traders do not believe that sticky inflation will hinder the Fed’s plans of lowering interest rates. Markets will now focus on Thursday’s PPI data for further insight into the direction of inflation in the US.

Odds of a rate cut in March and May are practically nil. Rate cut odds in June are down to 60% from over 90% at the beginning of the year. In addition, only 25 basis points of rate cuts are priced in by June, against 50 bp before. Market expectations of rate cuts are becoming more moderate as policymakers have stated that they intend to start reducing interest rates slowly. 

Gold prices are propped up by rising geopolitical tensions, which raise the appeal of safe-haven assets. Concerns that the Geopolitical crisis in the Gaza area may spread to neighboring countries are raising demand for safe-haven assets, boosting gold prices. The war between Israel and Hamas is threatening to spill over the Middle East as tensions rise in the Red Sea area.

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Written by:
Myrsini Giannouli

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