Gold prices climb as US inflation cools, sparking Fed rate cut talks

Gold prices climb as US inflation cools, sparking Fed rate cut talks

  • Gold skyrockets above $2,400 after softer US CPI sparks hopes for Fed rate cuts in 2024.
  • US 10-year Treasury yield drops 10 basis points to 4.187%, boosting Gold’s appeal.
  • CME FedWatch Tool shows 85% odds for September rate cut; US Dollar Index falls to 104.48.

Gold prices skyrocketed sharply during Thursday’s North American session after the release of the Consumer Price Index (CPI) in the United States opened the door for the Federal Reserve (Fed) to lower borrowing costs. Hence, US Treasury yields tanked, a tailwind for the precious metal. The XAU/USD trades at $2,414, up more than 1.80% after bouncing off daily lows of $2,371.

Market sentiment shifted sour as the S&P 500 and the Nasdaq 100 sank sharply, while the Dow Jones Industrial advanced. US yields are collapsing with the 10-year Treasury note yield down 10 basis points to 4.187%.

Data from the US Bureau of Labor Statistics (BLS) revealed that consumer prices deflated in June. Excluding volatile items like food and energy, the so-called core dipped as well, reigniting hopes that the Fed could cut rates in 2024.

The CME FedWatch Tool shows 85% odds for a quarter-point percentage rate cut in September, up from Wednesday’s 70% chances.

The December 2024 fed funds rate futures contract implies that the Fed will ease policy by 49 basis points (bps) toward the end of the year, up from 39 a day ago.

Other data showed the labor market remains robust as the number of Americans filing for unemployment benefits missed the consensus and came in lower than the previous reading.

Today’s US data presents a balanced Goldilocks scenario: inflation is decreasing while employment remains strong, with no signs of an impending recession.

Meanwhile, the US Dollar Index (DXY), which tracks the value of a basket of six currencies against the US Dollar, plummeted more than 0.40% and is down at 104.48.

Ahead of the week, the US economic schedule will feature the Producer Price Index (PPI) for June and the University of Michigan Consumer Sentiment survey for the same period.

Daily digest market movers: Gold soars due to Fed rate cut hopes

  • June US Consumer Price Index (CPI) contracted by -0.1% MoM, missing the forecast of a 0.1% increase. Core CPI also ticked lower from 0.2% in May to 0.1% in June, aligned with estimates.
  • Over the 12 months to June, headline US inflation dropped to 3%, down from 3.3%, while core inflation slumped to 3.3%, below estimates and down from the previous month’s 3.4%.
  • Initial Jobless Claims for the week ending July 6 came in better than expected at 222K, below the consensus of 236K and the previous reading of 239K.
  • According to the CME FedWatch Tool, odds of a September rate cut have increased to 84%, up from 72% on Wednesday.
  • Bullion prices retreated somewhat due to the People’s Bank of China’s (PBoC) decision to halt Gold purchases in June as it did in May. China held 72.80 million troy ounces of the precious metal at the end of June.

Technical analysis: Gold price climbs above $2,400, invalidates Head-and-Shoulders

Gold price resumed its aggressive uptrend and decisively broke the Head-and-Shoulders neckline, invalidating the chart pattern and opening the door for higher prices. Momentum remains on the buyers’ side, with the Relative Strength Index (RSI) finally showing signs of direction, trending up.

That said, the path of least resistance is to the upside. The XAU/USD first resistance would be the year-to-date high of $2,450, ahead of the $2,500 mark. Conversely, if Gold slides below the $2,400 figure, the next demand zone will be the July 5 high at $2,392. If cleared, XAU/USD would continue to $2,350

Fed FAQs

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.

 

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