Following the release of US CPI report, the US dollar initially sold off, helping to propel gold and major currency pairs higher. However, the gains evaporated shortly after with precious metals turning lower again. Given that the weaker CPI report supports the peak interest rates narrative, gold’s inability to hold onto its earlier gains was presumably driven by profit-taking as the metal again neared $2050, a level which it has struggled to get past on several occasions. For that reason, I continue to expect gold reaching even higher levels in the months ahead. My gold outlook remains positive.
CPI data gives Fed room to pause
While the market is convinced about the Fed reaching peak in terms of interest rates, the Fed Chair himself has left the door open to further rate increases, owing to a strong jobs market and still-high inflation. However, the Fed may soon have to cut anyway, keeping the metals supported.
For one thing, US inflation has fallen further – to 4.9% now from 5.0%, more than expected. In fact, following the release of CPI data earlier, the market has revised its expectations of a pause in hikes in the June meeting to 85% from 78% previously. What’s more, the odds of a rate cut in the same month has increased slightly, although you have to question that given Powell’s hawkish rhetoric. But a rate cut later in the year looks favourable. The market thinks this will come as early as September.
For another, concerns over the debt ceiling are rising and credit is tightening. The latest talks yesterday between President Biden and top congressional leaders over the debt ceiling impasse saw no progress. The US could default on its debt obligations if no resolution is found within the next 3 weeks or so. That would be unthinkable.
What’s more, China’s economic recovery appears to be fading, which was highlighted by a surprise 7.9% drop in imports on Tuesday, adding to the sluggish factory activity figures released last week.
For all of these reasons, the Fed may have to start cutting rates soon, possibly by September,. This could weigh further on the US Dollar Index, helping to boost the gold outlook.
Gold outlook: technical outlook
Given gold’s struggles in recent days, we are in need of a fresh bullish technical signal to confirm my suspicion that the weakness is just temporary and driven, above all, by profit-taking. Indeed, with gold holding above $2K, the bulls are still in control of price action. I will only entertain the bearish argument if we see a clear reversal pattern. Indeed, if XAUUSD were to break its most recent low at $1969, that would weight the gold outlook in the near-term at least. For as long as that level holds, I see any short-term weakness as just noise – and opportunity for would-be buyers.
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