Gold Bounces Back from Four-Week Low in Anticipation of U.S. Inflation Data

Gold prices increased in the European zone after reaching a near four-week low just a few days ago. With the dollar index declining against major currency rivals and the recent U.S. inflation data on everyone’s minds, gold has gained much-needed momentum. The U.S. dollar’s decline came in anticipation of last month’s inflation data, which will likely shape the Federal Reserve’s interest rate decision in September.

Gold prices increased by 0.4% to $1,921 per ounce after hitting a session low of $1,914 per ounce. The four-week lull likely occurred from demand concerns in China, causing the precious metal to lose 0.6% last Wednesday for the third session in a row. The recent losses have given many investors the opportunity to buy in before prices spike following the Federal Reserve meeting.

High interest rates create high opportunity costs for purchasing non-yielding assets like gold. If September’s Fed meeting concludes with a rate pause, as most expect, gold will likely gain more demand from the investor sector. The precious metal spiked after July’s meeting, despite the quarter-point hike, simply because of the rumors over the end of the hiking cycle coming soon.

The dollar index plummeted by 0.3% last Thursday, keeping it on track for its second consecutive loss against numerous currency rivals.

Philadelphia Federal Reserve President Patrick Harker believes the current interest rate will remain unchanged unless unexpected data enters the landscape. Harker also expects the Federal Reserve to begin cutting rates as soon as this year, despite numerous expectations pointing toward later dates in 2024. With that being said, Harker still claims that it’s too soon to say whether a hike will be necessary in September, as any new data can reshape the Federal Reserve’s strategy.

According to data from the CME’s FedWatch Tool, the chances of the Federal Reserve maintaining the current interest rate at the September meeting have now increased to 85% following the release of the latest U.S. jobs data report. Prior to this data, the probability sat at 78%.

Outside of the CME’s FedWatch Tool, the market is currently pricing a 14% probability for another quarter-point hike in September. The odds of a 0.25% hike in November currently sit at around 30%, given how much could change between now and then.

Last Thursday, traders anxiously anticipated the U.S. consumer prices update released on August 10. The data showed that consumer prices increased by 3.2% annually, the highest rate in the last 13 months.

With this release from the Bureau of Labor Statistics showing some of the strongest economic signals we’ve seen in the last year, the Federal Reserve’s decision seems even more evident now. As inflation cools, the need for interest rate hikes drops.

“Annual inflation has fallen by around two-thirds since last summer, and inflation outside of food and energy has fallen to its lowest level in any three-month period since September 2021,” President Biden explained in a statement on Thursday morning after the release of the report.

“We’ve made this progress while maintaining the broad strength of our economy: Unemployment remains near record lows, a higher share of working-age Americans are working now than in 20 years, real wages for the average American worker are growing and are higher than they were before the pandemic — with lower-wage workers seeing the largest gains,” he continued.

All of the above signals support the end of the rate-hiking cycle, which means positive news for the gold industry. Rather than further hikes, most expect the Federal Reserve to maintain rates until the economy responds appropriately.

“The July 2023 report’s core CPI result should reinforce the view that the Fed can begin to rely more heavily on hawkish rhetoric than on further interest rate hikes,” Kurt Rankin, PNC senior economist, explained. “This approach can make clear that the Fed will not allow inflation to reignite and that policy will remain restrictive in the face of strong consumer demand and wage growth but that past action can be allowed to continue to do the work that now appears to be bearing fruit.”

How the economy will respond to the end of the hiking cycle still remains unclear, though a hard landing would likely bode well for gold prices.

As we progress through August and approach September, traders can keep their eyes on similar key data points to estimate how the Federal Reserve will respond. With gold prices currently in a lull, many are choosing to strike now before they rise again. As always, investors should consult their advisors before making any portfolio decisions.

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