Gold price (XAU/USD) falls from $2,350 in Friday’s early New York session as the United States annual core Personal Consumption Expenditure Price Index (PCE) data for March has remained above estimates. The annual underlying inflation data rose at a higher pace of 2.7% from the estimates of 2.6% but decelerated from 2.8% recorded in February.
Higher-than-expected figures weigh on Gold’s appeal as it lighten hopes of Federal Reserve (Fed) rate cuts in the September monetary policy meeting. The monthly underlying inflation data grew in line with expectations and the prior reading of 0.3%. The scenario bodes well for bond yields and the US Dollar.
10-year US bond yields are slightly down at 4.69% but are still close to a five-month high. Yields remain firm as stalling progress in inflation declining to the 2% target will strengthen prospects for the Fed delaying rate cuts to later this year.
Meanwhile, The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, rebounds to 105.80 after hotter-than-expected inflation data. The US Dollar fell on Thursday after weak US Q1 GDP growth raised doubts over the economy’s ability to maintain its strength in upcoming quarters.
Gold price rebounds after discovering buying interest near the 20-day Exponential Moving Average (EMA), which trades around $2,315. The near-to-long-term appeal remains strong as Exponential Moving Averages (EMAs) for short to longer terms are sloping higher.
On the downside, a three-week low near $2,265 and March 21 high at $2,223 will be major support zones for the Gold price.
The 14-period Relative Strength Index (RSI) falls below 60.00, suggesting that bullish momentum has come to an end at least for now. However, the long-term upside bias is intact as long as the RSI sustains above 40.00.
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.