- Gold price rises for the straight third trading session due to easing US inflation.
- The US headline CPI rose at 3.2%, its slowest pace for two years.
- Investors await US Retail Sales, PPI, and the outcome of the Biden-Xi meeting.
Gold price (XAU/USD) extends rally as easing price pressures in the US economy have dented bets of further policy-tightening by the Federal Reserve (Fed). The precious metal capitalized on slow growth in the US headline inflation, which decelerated due to a sharp fall in gasoline prices. The soft US inflation report for October indicates that current interest rates set by the Fed are adequate to bring down inflation to 2%.
The US Dollar and bond yields are down as the soft Consumer Price Index (CPI) has underpinned a risk-on impulse. Easing consumer inflation has boosted confidence among investors in the possibility of early rate cuts by the Fed. Going forward, market participants will keenly watch monthly US Retail Sales data and the Producer Price Index (PPI) report for October.
Daily Digest Market Movers: Gold price jumps on easing price pressures
- Gold price aims to extend recovery above $1,970.00 as a substantial decline in the US consumer inflation in October indicates that the Federal Reserve will likely not raise interest rates further.
- The US inflation data for October, released on Tuesday, indicated that headline inflation decelerated significantly. The annual headline CPI rose by 3.2%, softened from estimates of 3.3% and the former reading of 3.7%. This was the slowest growth in headline inflation in more than two years.
- A significant decline in the headline inflation rate was prompted by a sharp fall in global Oil prices.
- Rental prices continued to rise in October but at a slower pace than in September. Food and grocery prices expanded at a higher pace of 0.3%.
- Monthly core inflation, which takes out volatile Oil and food prices grew by 0.2% against estimates – and September’s growth rate – of 0.3%. Annual core inflation rose by 4.0%, decelerated from expectations and the prior release of 4.1%.
- Though core inflation declined more than expectations, the pace of decline was nominal, which indicates lingering stickiness. This remained a major concern for Federal Reserve policymakers last week, which forced them to lean toward raising interest rates further.
- Last week, Federal Reserve Chairman Jerome Powell commented that the central bank won’t hesitate in tightening monetary policy further as a failure to control inflation would be their biggest mistake.
- After the release of the US inflation data, Richmond Federal Reserve Bank President Thomas Barkin, speaking at an event in South Carolina, said the core inflation was partly offset by supply shortages.
- Thomas Barkin added that the central bank is making real progress on inflation but is not convinced inflation is on a smooth glide path back to its 2% target (for Core CPI). Barkin warned that the Fed needs to do more to curb demand and inflation.
- Latest inflation figures have turned the tide in favor of keeping interest rates unchanged by the Fed in the range of 5.25-5.50%. Economists hope that the Fed is done with hiking interest rates and that discussions about cutting interest rates will be early.
- The US Dollar Index (DXY) faced an intense sell-off after the release of the soft inflation report. The USD Index has refreshed its two-month low near 104.00 as easing inflationary pressures accelerated risk-taking. 10-year US Treasury yields fell sharply to 4.43%.
- Going forward, investors will focus on the monthly US Retail Sales data and Producer Price Index (PPI) for October, which will be published at 13:30 GMT.
- As per the consensus, the US Retail Sales contracted by 0.3% against an expansion of 0.7% in September. A sharp decline in consumer spending could keep pressure on the US Dollar.
- In addition to the US economic data, US President Joe Biden’s meeting with China’s President Xi Jinping at the White House will be keenly watched. Discussions about the Israel-Palestine war are widely anticipated.
- Gains in Gold could be limited due to risk-on mood and easing Middle East tensions.
Technical Analysis: Gold price rises close to $1,970
Gold price jumps close to $1,970.00 after the release of the soft US inflation report. The precious metal resumed its upside journey after discovering significant buying interest near the 50-day Exponential Moving Average (EMA). The recovery in Gold has been extended above the 20-day, which indicates that the broader appeal has turned extremely bullish.
Gold has played a key role in human’s history as it has been widely used as a store of value and medium of exchange. Currently, apart from its shine and usage for jewelry, the precious metal is widely seen as a safe-haven asset, meaning that it is considered a good investment during turbulent times. Gold is also widely seen as a hedge against inflation and against depreciating currencies as it doesn’t rely on any specific issuer or government.
Central banks are the biggest Gold holders. In their aim to support their currencies in turbulent times, central banks tend to diversify their reserves and buy Gold to improve the perceived strength of the economy and the currency. High Gold reserves can be a source of trust for a country’s solvency. Central banks added 1,136 tonnes of Gold worth around $70 billion to their reserves in 2022, according to data from the World Gold Council. This is the highest yearly purchase since records began. Central banks from emerging economies such as China, India and Turkey are quickly increasing their Gold reserves.
Gold has an inverse correlation with the US Dollar and US Treasuries, which are both major reserve and safe-haven assets. When the Dollar depreciates, Gold tends to rise, enabling investors and central banks to diversify their assets in turbulent times. Gold is also inversely correlated with risk assets. A rally in the stock market tends to weaken Gold price, while sell-offs in riskier markets tend to favor the precious metal.
The price can move due to a wide range of factors. Geopolitical instability or fears of a deep recession can quickly make Gold price escalate due to its safe-haven status. As a yield-less asset, Gold tends to rise with lower interest rates, while higher cost of money usually weighs down on the yellow metal. Still, most moves depend on how the US Dollar (USD) behaves as the asset is priced in dollars (XAU/USD). A strong Dollar tends to keep the price of Gold controlled, whereas a weaker Dollar is likely to push Gold prices up.