Gold Price Outlook Ahead of US CPI

Gold prices may get a boost from weaker-than-expected CPI data if it signals that the Fed's rate hikes are cooling the economy.

Gold price volatility may rise following the print of numerous CPI indicators as markets digest what that could mean for Fed policy. Let’s take a look at the data⬇️

Headline, year-on-year CPI data for June is anticipated to shrink to 3.1%, down from the 4.0% print for May. On a month-on-month basis, CPI is expected to grow 0.3%, up from the previous 0.1% print. But that is not the main indicator analysts will be scrutinizing.

Core CPI (ex food and energy) remains stubbornly high. Analysts are expecting price growth for June on a year-on-year basis to show a reading of 5%, 3% higher than the Fed’s 2% mandate but slightly below the previous reading of 5.3%. It is therefore not surprising that as of July 11, interest rate futures are pricing in an 88% chance of a hike at the July 26 FOMC meeting. Fed Chairman Jerome Powell has made it clear he is determined to avoid entrenched inflation.

But what does this have to do with gold?

The yellow metal hit the highest level on record at approximately 2081.82/troy ounce in May. Gold is frequently traded as an anti-inflation hedge. But, despite Fed interest rate hikes, gold has sometimes declined.

Why?

Source: TradingView

With credit conditions tightening and yields rising, the cost of holding a non-interest-bearing asset increases at a commensurate rate. And this is where CPI data and its effect on monetary policy comes in.

If CPI data comes in weaker than expected, gold prices may rise. Weaker CPI data means the impetus for the Fed to continue raising rates decreases, and may shorten the horizon of future rate cuts. The result would be looser credit conditions, lower yields, and therefore a lower cost for holding a non-interest bearing asset.

It is not an accident that gold prices and the market for negative-yielding debt rose in tandem with each other between 2018-2019. Logic suggests the inverse holds.

Source: DailyFX

Furthermore, a rise in rate cut bets could see capital flow out of the US Dollar, which by definition would also indirectly push gold prices up higher; all gold (and most commodities) are priced in USD.

None of the above constitutes financial advice.