Gold takes a breather at $2,700 with all eyes on US inflation
- Gold rally stalls below $2,700 with all eyes on the US CPI data for November.
- US Consumer Prices are expected to show sticky inflationary pressures and might provide a fresh boost to the USD.
- XAU/USD’s technical picture remains positive, with price action standing above the last two week’s trading range.
Gold (XAU/USD) is hesitating on Wednesday after having rallied about 2.5% over the previous three days. The precious metal has been capped at the $2,700 round level during the early Asian session, with investors reluctant to bet against the US Dollar (USD) ahead of the release of the US Consumer Prices Index (CPI) reading at 13:30 GMT.
Price pressures in the United States are expected to have remained sticky in November, with headline inflation picking up. While the data is unlikely to deter the Federal Reserve (Fed) from cutting rates by 25 basis points (bps) next week, it might limit the scope of the easing cycle heading into 2025.
Beyond that, the situation in the Middle East remains uncertain. The Syrian rebels have appointed a prime minister for a transitional government while Israel has stepped up its attacks on the Syrian army’s facilities. Ongoing tensions in the area are buoying safe-haven flows into Gold.
Daily digest market movers: Gold rally stalls as US Dollar firms up
- US consumer prices are expected to confirm that inflation remains sticky above the Fed’s 2% target rate. The headline CPI is seen growing by 0.3% in the month and by 2.7% yearly, faster than the 0.2% and 2.6% increases seen in October. The core CPI is expected to have increased at a steady 0.3% monthly and at a 3.3% yearly pace.
- The CME Group’s Fed Watch Tool shows that futures markets are pricing an 86% chance of a 25 bps Fed cut after the December 17-18 meeting, and between two to three more cuts in 2025.
- In Syria, the rebels have appointed the Islamist Mohammed al-Bashir as the transitional prime minister. The US and Israel have been attacking the infrastructure of the Islamic State and Syrian army bases. There is a tense calm but uncertainty about the success of the provisional government remains high.
- Later today, the Bank of Canada (BoC) is expected to deliver a second consecutive 50 bps cut. The Swiss National Bank (SNB) and the European Central Bank (ECB) are expected to cut their respective benchmark rates by a quarter-percentage point on Thursday.
Technical analysis: XAU/USD consolidates gains right below $2,700
Gold’s recent rally has lost some steam, with US Treasury yields bouncing up and the US Dollar appreciating ahead of the US CPI release. The broader trend, however, remains positive, with downside attempts limited above the top of the last two week’s previous range at $2,675.
Above the mentioned $2,700, the November 24 high at $2,720 will come into view ahead of the November 4,5 and 6 highs at around $2,750.
On the downside, immediate support is the intra-day low at $2,675 and then the December 9 low at $2,630, followed by the channel bottom (November 26 and December 5 lows) at $2,610.
XAU/USD 4-Hour Chart
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.