Gold Price Rallied On Weak US Inflation Despite Hawkish Fed Tilt

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  • Gold soared above $2,330 on Friday as investors appeared to bet on Fed rate cuts later this year.
  • Risk aversion due to European political turmoil boosted demand for safe-haven assets like gold.
  • US Consumer Sentiment dipped in June, while inflation expectations remained above the Fed’s 2% target.
  • XAU/USD was underpinned by the fall in 10-year US Treasury yields.

Gold's price spiked during the North American session on Friday after inflation data in the United States increased investors' hopes of the Federal Reserve cutting interest rates later this year. Additionally, risk aversion, spurred by Europe’s political uncertainty, triggered a flight to safety, bolstering the golden metal.

The XAU/USD was seen trading at around $2,333, gaining more than 1.30% after bouncing off the daily lows of $2,301. Sentiment remained sour, yet US equities recovered some during the last hour of trading, with the Nasdaq up 0.28%, while the S&P 500 trimmed its earlier losses, shy of being flat at -0.10%.

On the data front, US Consumer Sentiment deteriorated in June, while inflation expectations for one and five years remained above the Fed’s 2% goal. Meanwhile, US inflation data revealed during the week was celebrated by investors, who still bet that the US central bank will slash rates twice instead of just once, as policymakers projected.

Recent data from the Chicago Board of Trade (CBOT) showed traders expect 39 basis points (bps) of easing during the year via December’s 2024 fed funds rate contract. The US 10-year Treasury note yield dropped three bps to 4.211%, a tailwind for the non-yielding metal, shrugging off China’s bullion purchasing pause.

News that the People’s Bank of China paused its 18-month bullion buying spree weighed on the precious metal. PBOC holdings held steady at 72.80 million troy ounces of gold in May.

Market Movers: Gold Price Strengthened amid Strong US Dollar

  • The US Dollar Index (DXY) increased by 0.28% to 105.53, capping gold prices.
  • The University of Michigan Consumer Sentiment Index fell to 65.6 in June from 69.1, missing the consensus estimate of 72. This marks the lowest level of sentiment in seven months.
  • Inflation expectations for the next twelve months are projected to remain unchanged at 3.3%; while for the five-year period, inflation expectations are anticipated to decrease to 3.1%, down from the previous 3.3%.
  • On Wednesday, Fed Chair Jerome Powell stated that the Fed are less confident about inflation than they were previously. He added, "If jobs are to weaken unexpectedly, the Fed is ready to respond." When asked about the US CPI report, Powell noted that it is just one report and emphasized the need to see the deflation process evolving toward the Fed’s goal.
  • Despite US CPI report showing disinflation process continuing, Fed Chair Jerome Powell commented that they remain “less confident” about the progress on inflation.
  • Even though the latest US CPI and PPI reports were weaker than expected, the latest NFIB Small Business Optimism Index survey for May showed that businesses are struggling with higher prices and access to cheap financing.

Technical Analysis: Gold Price Sellers Regained Control as Prices Headed Toward $2,300

The price of gold appeared to be neutral to downward-biased as the head-and-shoulders chart pattern remained in place, suggesting the stage was set for further downside. Although momentum showed the buyers’ recovery, the Relative Strength Index (RSI) remained bearish, suggesting that the uptrend could be short-lived and open the door for further losses.

If gold could extend its gains past the June 7 cycle high of $2,387, it would then be ready to test the $2,400 figure. Conversely, if XAU/USD dropped below $2,300, the first support would be the May 3 low of $2,277, followed by the March 21 high of $2,222. Further losses may lie beneath that point, as sellers would eye the head-and-shoulders chart pattern objective at around $2,170 to $2,160.

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