Following a 2.5% surge in gold prices last week, the precious metal has spent the initial part of this week in a consolidation phase, anticipating the release of the pivotal CPI report. Traders have been capitalizing on the dollar’s attempts at recovery since the unveiling of disappointing April non-farm jobs data, alongside underwhelming ISM surveys and weekly jobless claims figures. Their reasoning revolves around the notion that the pace of the US economic rebound is decelerating, potentially curbing inflation and lessening the necessity for prolonged monetary tightening. Furthermore, the Federal Reserve’s scaling back of its balance sheet runoff has exerted additional downward pressure on the dollar. It appears that there is a broader macroeconomic catalyst propelling recent forecasts for gold and other commodities, such as copper and silver. Signs of a turnaround in China, coupled with improvements in data from the Eurozone and the UK, have contributed to this sentiment. Consequently, while the recent upswing in gold prices partly reflects a weakened dollar and heightened prospects of a Fed rate cut, the primary impetus remains the surge in demand for inflation hedging and central bank acquisitions. Speaking of inflation.
Gold Forecast: Anticipating Today’s CPI Data – How Will the Metal Respond?
The selling pressure on the dollar might intensify if we witness a larger-than-anticipated decline in CPI. A diminished dollar would amplify the allure of precious metals. Nevertheless, this doesn’t necessarily imply that gold will inevitably decline if we observe a more pronounced inflationary report.
Indeed, heightened inflation has been a major driving force behind gold’s recent ascent, as investors seek to safeguard the value of their wealth denominated in fiat currencies by investing in assets offering some degree of protection against inflation, such as gold. Consequently, irrespective of the outcome, today’s CPI report is poised to benefit gold—either through heightened demand for inflation hedging (in the case of hotter CPI data) or a weakened US dollar (if CPI figures fall short). Therefore, any adverse reaction in gold is likely to be constrained, with buyers prepared to seize opportunities near immediate support levels.
Before delving into a more detailed discussion on what to expect from the CPI and the dollar, let’s take a brief glance at the gold chart ahead of the CPI report.
Gold Forecast: Key Technical Levels to Monitor
After breaking out from the descending wedge continuation pattern, the gold chart has been gradually climbing, yet it has not managed to surpass its 61.8% Fibonacci retracement level of $2372 from April’s peak. A breakthrough above this threshold could open the door to a fresh all-time high beyond $2431, although encountering resistance near $2400 initially. Immediate support is evident around $2360, followed by the range between $2320 to $2330, representing the foundation of the wedge pattern breakout. A decline below the $2320 support level could signal a negative turn in the short-term gold outlook.
Analyst Projections: Anticipated CPI Figures
Analysts project that CPI likely moderated in April, marking the first decrease in six months. Such an outcome would signal a potential alleviation of price pressures following consecutive upward surprises throughout 2024. Forecasts indicate a drop in CPI to 3.4% year-on-year in April, down from the previous month’s 3.5%. On a month-over-month basis, an increase of 0.4% is expected. Core CPI, excluding food and fuel, is anticipated to rise by 0.3% month-over-month and 3.6% year-on-year.
The forthcoming consumer inflation figures will offer investors greater clarity on the timing and extent of potential interest rate adjustments by the Fed. Ahead of this release, Jerome Powell reiterated expectations of gradual monthly price declines, despite minimal inflation progress in the first quarter. Should his projections materialize, a more significant decline in the dollar could ensue, potentially benefiting major currency pairs like EUR/USD and AUD/USD, as well as gold and silver. Alternatively, dollar bears may need to exercise patience until further evidence emerges in the coming months indicating a downward trajectory of inflation towards the Fed’s 2% target.
Gold Forecast: Weakening US Dollar Preceding CPI Release
During Wednesday’s initial trading session, the US dollar experienced a slight downturn, following a sell-off the previous day. Various internal and external factors have influenced this decline in the greenback. Despite April’s Producer Price Index (PPI) reporting a higher-than-anticipated 0.5% month-on-month increase, the dollar remained subdued due to downward revisions for March and declines in specific PPI components, impacting the Federal Reserve’s favored inflation measure, the core Personal Consumption Expenditures (PCE) index. Externally, reports suggesting potential Chinese backing for its housing market have boosted currencies like the yuan and the Australian dollar, contributing to the dollar’s depreciation. Furthermore, the ongoing global stock market surge has favored riskier currencies, further weighing on the dollar’s strength. Nonetheless, the dollar’s decline is not substantial, as it maintains an upward trajectory over the longer term. However, its resilience could potentially reverse should inflationary pressures alleviate more than expected.
