Gold’s rally could continue on US inflation data

Recent US inflation data released on Tuesday indicated a slower increase in producer prices. This has led to growing expectations that the Federal Reserve will soon lower interest rates. A weaker US dollar, resulting from these expectations, has benefited gold prices.

Gold was the biggest winner following the release of the inflation data, surging nearly 1.8% by the end of Tuesday’s trading session. This increase is attributed to gold’s inverse relationship with the US dollar.
Driven by expectations of an interest rate cut, fueled by the positive inflation data, the US dollar weakened significantly. As a result, gold prices broke through the $2,500 per ounce resistance level when Wall Street opened.

Gold futures climbed to $2,513 per ounce on Tuesday, up from the previous closing price of $2,470. The precious metal traded between a low of $2,462 and a high of $2,513 for the day.

Meanwhile, the dollar index, which measures the US currency against a basket of major currencies, dipped to 102.70 points from the previous day’s close of 103.14. The index ranged between a low of 102.70 and a high of 103.27 during the trading session.

US producer prices increased by 0.1% in July on a monthly basis. This was in line with market forecasts and represented a slowdown from the previous month’s 0.2% increase.
On an annual basis, producer prices rose by 2.2% in July. This was lower than market expectations of a 2.3% increase and represented a decline from the previous year’s figure of 2.7%.

Positive economic data boosted market confidence, driving up US stock prices and weakening the US dollar. Investors anticipated lower returns on the dollar and dollar-denominated assets.

Returns on the US dollar

US Treasury bond yields decreased at the end of Tuesday’s trading session. This decline was influenced by US inflation data released by the Bureau of Labor Statistics, which indicated a slowdown in producer price growth.

The yield on ten-year US Treasury bonds dropped to 3.848% from the previous closing value of 3.908%. During the session, the yield ranged from a low of 3.847% to a high of 3.928%.

The latest US inflation data has strengthened market expectations of an interest rate cut by the Federal Reserve at its September meeting. Since there’s an inverse relationship between interest rate expectations and Treasury bond yields, these yields declined as the likelihood of a rate cut increased.

Key data

Next week, investors will closely watch new inflation data, which is expected to show continued price declines in the United States. Three key indicators will be released to provide insights into US consumer spending.

These indicators include the Consumer Price Index (CPI) and the Producer Price Index (PPI). Market analysts widely predict that the CPI, one of the most important economic indicators, will continue to fall and may reach 3.00%.

Expectations for interest rate cuts are influenced not only by inflation data but also by employment figures, which are another key component of the Federal Reserve’s dual mandate.

Recent employment data indicates a weakening labor market, further supporting the belief that the Federal Reserve may soon lower interest rates.

Fed and economic data

Atlanta Federal Reserve President Rafael Bostic stated on Monday that the current tight monetary policy is unsustainable. While recent inflation data has increased his confidence in the possibility of returning to a 2% inflation target, he emphasized the need for more data to confirm this trend.

Bostic indicated a willingness to wait for the first interest rate cut, which he believes will occur later this year if the economy performs as expected. He acknowledged the strong labor market but expressed concern about potential layoffs and job cancellations, indicating that a softening labor market would strengthen the case for rate cuts.

The Fed official stressed the importance of balancing inflation control with maintaining a healthy job market, emphasizing the need to avoid a recession.