Market Movements Unveiled: Gold’s Response to Weak U.S. Inflation Data and EUR/USD’s 2023 Peak Exploration

With weaker-than-expected inflation data in the U.S., gold prices finally broke the $1,950-per-ounce barrier. At the same time, the U.S. dollar sank below expectations, though the odds of another interest rate hike are seeming less likely, giving further rise to gold. EUR/USD finally reached its base level for the first time since March 2022, moving past the 1.1100 handle. 

In response, last Wednesday alone, gold prices gained 1.3% with U.S. dollar weakness and plummeting U.S. treasury yields giving rise to the precious metal. The better-than-expected inflation figures also meant positive news for the gold market as more analysts hopped on the concept of the interest rate hiking cycle finally coming to an end.  

The U.S. Bureau of Labor Statistics released the Consumer Price Index figure for June, coming in at 3%, which was one-tenth below market estimates. In May, the recorded rate was 4%, largely above last month’s figure. The report’s core gauge also came as a surprise at 4.8% compared to the estimated figure of 5%, showing that the restrictive monetary policies employed by the Fed may actually be paving looser underlying pressures. 

As a result, the positive figures from the labor report triggered a shift in expectations surrounding future interest rate hikes. Treasury yields dropped in response across all maturities, especially at the curve’s front end. While the odds of a rate hike in July may still sit at 90%, many see this as the end of the long, painful battle, with the chances of a hike in September and onward dropping significantly. 

This new outlook on how the Fed may respond to market conditions sent the U.S. dollar plummeting. The DXY index hit its weakest low point in the last two years. 

At the same time, EUR/USD skyrocketed by 1.1%, breaching its 1.1100 line, finally reaching the high point it held back in March 2022. GBP/USD showed a relatively strong rally, successfully hitting its long-awaited 1.3000 handle. 

Analysts are currently forecasting positive short-term growth for the gold market. As nominal and real yields take hits, gold can enjoy the short-term rise, though whether or not this growth will maintain itself will likely depend on the incoming labor market data. Moving forward, traders can keep their eyes on the upcoming economic release as a hint to where the gold market is heading.  

Gold futures successfully breached the psychological $1,940 line after last Wednesday’s rally. Similar moves in this direction could push gold prices right back above that long-awaited $2,000-per-ounce line. 

According to a survey done by State Street Global Advisors, investors plan to increase their gold holdings by the end of the year, which will likely provide critical demand support to the precious metals market. The survey included 1,000 traders who have at least $250,000 invested in various assets. One-fifth of this group responded that they’re investing some of their portfolios in gold assets, with the average portfolio allocation being 14%. 

The majority of the gold-investing surveyors use physical bullion as their asset of choice, while just under half use gold ETFs. 57% of the gold ETF group responded to the survey saying that they plan to raise their investments within the next six months to a year. Only 3% plan to decrease their holdings and 40% will keep them the same. 

The survey also revealed that gold investors are getting younger. 17% of millennial surveyors had gold in their portfolios, though only 10% of Baby Boomers and Gen X traders have followed the same strategy. 

“I think that there were a number of people in my Boomer generation who were perhaps a little slow to adopt the ETF trends,” George Milling-Stanley, the Chief Gold Strategist at State Street Global Advisors, explained. “The millennials were probably the ones who adopted it with the most enthusiasm.”

Between weak U.S. inflation data, soaring EUR/USD performance levels, falling expectations of rate hikes, and rising investor demands from young populations as we enter the second half of the year, the odds are in gold’s favor. 

Let’s not forget about rising central bank demand, either. Following record purchase rates from 2022, central banks have not slowed down their gold-buying frenzy yet this year, already setting records in the first quarter. If demand continues at its current rate, we may see another record-breaking year, offering critical support to gold pricing. 

For now, we can keep an eye on upcoming Fed meetings and job data releases. As always, investors should consult their financial advisors before making any portfolio decisions. 

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