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Attention is firmly fixated on the upcoming release of the US inflation report, which has the potential to move the markets sharply. Ahead of it, the US dollar index has extended its losses for the fifth consecutive day, with US 10-year bond yields declining for the third day in a row. Consequently, gold is finding itself higher, along with the European markets and US index futures.
 

Why is gold higher?

Well, as mentioned, we have seen bond yields decline at the start of this week, with investors potentially anticipating a weaker inflation report later in the day on Wednesday.  This has reduced the opportunity cost of holding gold over bonds slightly. Other than that, gold is also helped along by the weakness observed in the dollar, especially in the pairs like the USD/JPY and USD/CHF, while short-side profit-taking is an additional reason behind its small gains.

The greenback has fallen to a 2-month low on bets that the Fed is close to reaching peak rates this cycle. The weaker US suggests investors are possibly expecting to see a weaker-than-expected CPI report and, in any case, a 25-basis-point rate hike is now fully priced in.
 

What to expect from the CPI report?

The inflation report is expected to show that consumer prices cooled to a 3.1% annual pace in June. The actual reading will need to be substantially below 3% for the odds of a 25-bps hike to fall meaningfully from the current level of around 95%. 

However, inflation is only expected to fall sharply mainly due to base effects. Indeed, on a month-over-month basis, CPI is expected to rise 0.3% - not something that would appease the Federal Reserve.

Meanwhile, core inflation is expected to cool for a third straight month to a still very high 5.0% from 5.3% previously. The Fed will want to see core prices decline toward their 2% target before thinking about cutting rates again. It could still be a long time.

For now, investors are fully expecting a potentially last rate increase in July, but the inflation report is still going to be important because the data may shed more light on whether to expect another hike this year.
 

So, is gold going to rise from here?

Well, it depends. Gold is not out of the woods just yet, with many major central banks still tightening policies. As mentioned, the Fed is now almost certain to hike rates one more time at least in July. Investors are obviously looking beyond the summer and wonder whether and how fast interest rates will fall again. A lot will depend on the direction of prices and today’s CPI report will therefore be very important. So, in the short-term outlook, I wouldn’t rule out further falls as the CPI could overshoot estimates. But in the long term, there’s no doubt in my mind that we will see gold break to unchartered territories.
 

What does the chart of gold tell us?

The breakout from the falling wedge patten is technically a bullish signal for XAUUSD. We will just need to see some upside follow-through for confirmation. So, it will be very important to watch how gold closes today’s session. A closing break above $1935 is what I would be looking for form a bullish point of view. But if we see prices turn lower and observe similar price action in FX, then this would re-instate its bearish bias. In that case, look out below!

(Click on image to enlarge)

Source: TradingView.com

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