US inflation data rose more than expected in June. After that, the gold market dropped to session lows and remains under pressure.
US inflation hits a new high
cryptocoin.comAs you follow on Wednesday, the US Department of Labor announced that the CPI increased by 1.3% in June. Meanwhile, economists had forecast a 1.0% increase. Therefore, the data has outstripped consensus estimates. Thus, inflation for the year rose to 9.1%, significantly exceeding expectations. Economists had expected inflation to rise 8.6%. Annual inflation hit the highest level since November 1981, according to the report.
Meanwhile, core inflation, which drives food and energy prices, came in warmer than expected, up 0.7%. However, the same data had increased by 0.6% in May. According to consensus estimates, economists had expected a 0.5 percent increase. As a result, core inflation for the year increased by 5.9%.
Adam Button: Fed will struggle to soften stance
On the other hand, despite the warmer-than-expected data, the gold market does not see any new upward momentum as a hedge against inflation. Gold remains under pressure as the latest inflation data support more aggressive monetary policy tightening from the Federal Reserve, according to some market analysts.
Forexlive chief currency strategist Adam Button says markets are pricing in a 23% chance for a 1.00% rate hike later this month. “Only in headline shock, ‘over 9%,’ said Button. Not nice for Main Street. The Fed will have a hard time softening its stance,” he says.
Katherine Judge: Latest data will add some urgency to Fed’s march
However, the report notes that the increase in consumer prices was broad-based. However, rising energy prices continue to dominate the market. The report shows that the energy index rose 7.5% last month. He says energy contributed to almost half of the increase in all items. Katherine Judge, senior economist at CIBC, comments:
The stunning inflation report will add some urgency to the Fed’s walkway. However, I do not foresee that the pace will increase this month. Overall, these data clearly support a 75 basis point increase from the Fed this month.
Gold price ignores persistent high inflation
Gold price pulled fresh selling near the $1,732 region in the early North American session. Hence, it fell for the third consecutive day on Wednesday. The most recent decline followed the release of higher-than-expected US consumer inflation figures.
The data initially dragged gold to its lowest level since August 2021, around the $1,710-1,705 region. Typically, gold is accepted as a hedge against rising inflation. According to market analyst Haresh Menghani, it failed to impress the bulls after the US CPI.
Fed’s interest rate hike claims continue to gain weight
The stronger-than-expected US CPI report reaffirmed bets on more aggressive rate hikes by the Fed. Markets are now pricing in about 80% probability for a 75 basis point gain on July 27. Also, the 100 basis point rate is currently up to 35%. This led to a sharp increase in US Treasury bond yields. This is the key factor that puts heavy downward pressure on non-yielding gold.
Strong USD puts additional pressure on gold
Expectations for a faster policy tightening by the Fed helped the US dollar reverse its modest intraday losses. In this way, DXY has reached a new high of two decades. This further contributed to the diversion of flows away from dollar-denominated gold. However, a new wave in global risk aversion trading is likely to offer some support to the safe-haven amid rising recession fears.
May limit losses under recession fears
Meanwhile, the geopolitical risk Russia-Ukraine war continues. In addition, the latest Covid-19 outbreak has not yet disappeared. In this environment, investors are concerned that a more aggressive move by major central banks to curb inflation will pose challenges to global economic growth. This led to a prolonged sell-off in global equity markets. The analyst notes that traditional safe-haven assets, including gold, tend to benefit from it.
Gold price technical view
Market analyst Haresh Menghani analyzes the technical outlook of gold in the light of recent developments as follows. Gold price is now pointing to the round figure of $1,700 to give some support. A convincing break below that level could be seen as a new trigger for bearish traders. This is likely to drag gold around the $1,787-1,786 region, which is the low of September 2021. The downside trajectory could expand further near the 2021 low area of $1,677-1,676.
On the other hand, any meaningful recovery attempt is likely to face stiff resistance near the daily top, around the $1,732 region. The strength sustained beyond is likely to trigger a short-term move towards the $1,744 area in the $1,752 region and the strong horizontal support breakout of $1,767-1,770.
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