Gold rises, dollar slumps despite hot CPI

As the saying goes, the market’s reaction to news is always more important than the news itself. Look no further than today’s price action to news of another acceleration in US inflation to know what I mean. More to the point, there is a possibility we may have seen a top of the greenback and a low for gold, EUR/USD, GBP/USD and et. al.

As you would expect, gold fell sharply in the aftermath of the super-hot US CPI report, as odds for further sharp rate hikes sent the dollar higher. But the precious metal then staged a sharp recovery to turn flat on the session. This coincided with the dollar also coming under pressure. The EUR/USD which briefly dipped below the 1.0000 handle turn around and rallied more than 100 pips.

The post-CPI reaction clearly suggests that investors are thinking that the big inflation readings will hurt the economy so badly that not only will the Fed stop hiking rates soon, but will go in reverse in as early as Q1. Indeed, US 10-year bond yields went back below 3%, while the market simultaneously priced in 18 basis points of rate cut for the first quarter of 2023.

This begs the question: is gold becoming an attractive investment again given the rising expectations for interest rate cuts for the start of 2023? Are investors going to start building long positions on gold amid increased haven demand?

Well, to be honest, it is very difficult to say at what point gold might resume its role as a safe haven asset again. The prospects of further, sharp, rate increase in the near term is what is holding gold investors back right now. As we saw with the Bank of Canada, they surprised with a bigger hike today of 1%, no less. The Fed could follow suit given the further acceleration in inflation. Ultimately, the dollar has to stop rising before we see gold make a meaningful comeback. Today’s drop in the greenback may be what gold investors were waiting for, although it is far too early to draw too many conclusions from one day’s worth of price action.

BUT I can’t ignore this beautiful-looking hammer candle that is being created on the daily chart of gold:

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