Why Has Gold’s Rally Stalled Despite Weaker USD?

Gold’s recent surge to a new record high has stalled, but the precious metal remains poised for further gains. Despite mixed US inflation data, the overall economic picture points to an increasingly clear path for Federal Reserve interest rate cuts. This has solidified the market’s belief that policy easing is on the horizon, providing a powerful tailwind for gold prices. Following the release of the US Consumer Price Index (CPI), gold (XAU/USD) recovers from initial dips on Thursday as Treasury yields and a weaker US dollar (USD) provide moderate support. After reaching an all-time high of about $3,675 earlier this week, the yellow metal is currently trading at about $3,636, finding it difficult to draw in new buyers.

Mixed Signals from the US Economy

The latest Consumer Price Index (CPI) report sent a confusing message. While headline inflation increased to 0.4% on a monthly basis, the core CPI figure, which the Fed watches most closely, remained steady at 0.3% on a monthly basis and 3.1% annually. This ambiguity comes on the heels of other recent data pointing to a softening US economy, including a significant drop in the Producer Price Index (PPI) to 2.6% annually and an unexpected jump in weekly jobless claims to 263,000.

These numbers have not shaken the market’s conviction. Following the CPI release, there’s now a strong probability of a 25-basis point rate cut next week, with expectations of up to three reductions by year-end. This prospect of monetary easing is pushing down Treasury yields, with the 10-year yield falling to 4.015%, making non-yielding assets like gold significantly more attractive.

Political Headwinds and Bullish Forecasts

The Fed’s independence is facing new scrutiny, adding another layer of uncertainty to the economic outlook. The Senate Banking Committee recently advanced the nomination of Stephen Miran to the Fed Board, a move that has raised concerns given his close ties to the White House. This political drama, combined with the anticipation of lower rates, is contributing to a bullish sentiment on gold.