Gold price forecast: XAU/USD retreats after US CPI report

Gold price eases following release of hotter-than-expected US CPI data

On Wednesday, the price of gold fluctuated around $1,910 per ounce, hovering close to its lowest point in three weeks as traders analyzed recently released U.S. consumer price index (CPI) data.

While the reading was largely in line with market expectations, with the CPI climbing +0.6% compared to the previous month and 3.7% year-on-year, core CPI — a reading that excludes volatile food and energy prices — was hotter than expected, increasing 0.3% month-on-month and 4.3% year-on-year respectively, versus estimates for 0.2% and 4.3%. Federal Reserve officials focus more on the core reading, as it acts as a better marker of where inflation is heading over the long term.

Following the CPI announcement, the expected course of action for the U.S. Federal Reserve (Fed) remained largely unchanged.

The market has already factored in a pause in interest rate hikes for the upcoming week, while the probability of a 25-basis-point increase in the key interest rate in the U.S. — known as the federal funds rate — in either November or December still stands at close to 40%, according to data from the CME FedWatch tool. The target range for the federal funds rate is currently 5.25%-5.5%, last raised in July 2023.

Market participants are concerned that the potential for increased headline inflation could raise the probability of a final interest rate hike by the Fed later this year.

As noted by ING’s Chief International Economist James Knightley:

“When measured to three decimal places, the 0.278% core print doesn’t look so bad. It is not a terrible miss, but markets will likely interpret it as showing the Fed can't completely relax, especially with the potential for higher energy costs to be passed through to other components and potential strike action leading to worries about vehicle prices, given their heavy weighting within the CPI basket.

So while September's FOMC will be a non-event in itself – markets are barely pricing 2bp of a full 25bp rate hike — today's report should ensure that officials keep one further hike in their dot plot forecast for the end of this year.”

The price of gold is typically highly sensitive to the escalation of U.S. interest rates, as this raises the opportunity cost of holding the non-yielding precious metal.

“Precious metal investors are less worried about higher inflation and more focused on the opportunity costs associated with holding a non-interest bearing asset in a rising rate environment,” explained Chris Gaffney, president at EverBank World Markets, in a note cited by Reuters.

Investors are now anticipating the release of U.S. August producer prices and retail sales data, as well as the European Central Bank's decision on rate hikes this Thursday, in preparation for the Federal Reserve's policy decision scheduled for September 20th.

Gold price forecast: XAU subdued following sticky US CPI reading

Following the release of the U.S. CPI reading, economists at TD Securities shared their gold price outlook with FXStreet:

“Gold has remained subdued as traders sold into a soft-landing theme amid fears of higher-for-longer rates. The modest upside surprise in today’s US inflation data could further compound these fears and keep the precious metals complex on the back foot.

However, the yellow metal could find support fairly quickly, with additional important data on the calendar for tomorrow. In this sense, a weaker retail sales number on Thursday could provide an offset to the inflation data and offer a challenge to the soft-landing narrative.”

Prior to the announcement, analysts at Australia-based bank ANZ said that a break below $1,900 could trigger a sell-off:

“To break the current downward trend, prices need to move above the recent high of $1,940, which coincides with the trendline resistance level. The next resistance lies near $2,000 and a decisive rally above that would confirm a bullish signal. The Relative Strength Index (RSI) looks neutral as well.

On the downside, a breach of $1,900 could set a bearish market sentiment.

Overall, we expect Gold to trade in the range of $1,900-$1,950, if there are no surprises from the Fed.”

The gold price forecast shared by economic data aggregator TradingEconomics saw the commodity trading at a potential average of $1,941.73 by the end of this quarter. The platform’s 12-month gold projection estimated it to trade at $2,011.97 by mid-September 2024.

When considering gold and other commodities for trading and price predictions, remember that trading CFDs involves a significant degree of risk and could result in capital loss. Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.