Gold (XAU/USD) jumped almost 2% on Thursday after softer-than-expected US inflation was announced. The precious metal, which had been building gains for the past two weeks, saw increased buying interest as markets took the softer CPI reading as a step closer to rate cuts.
Earlier in the week, Fed governor Jerome Powell said that whilst the labour market had shown significant signs of cooling, inflation was still a way away from the 2% target, which would not allow the central bank to start cutting just yet. Further evidence of a sustainable return to that target would be needed. Well, Thursday’s CPI data seemed to be enough evidence for markets, which caused a rate-cut-positive reaction in markets; dollar and yields down, equities and gold higher.
But, despite the exuberance in the initial reaction, there has been no official confirmation from FOMC members that the data has indeed proven enough weakness in price pressures to guarantee a rate cut. This seems to be the thought process on Friday morning as some of those gains have been retraced both in equities and gold.
XAU/USD daily chart
Past performance is not a reliable indicator of future results.
XAU/USD is hovering just above $2,400 at the time of writing after encountering resistance at $2,424 on Thursday. The path of the least resistance remains higher with the 20-day SMA attempting to break back above the 50-day SMA, which would reinforce the bullish appetite. Further resistance could arise between $2,430 and $2,450, which is its all-time high.
The metal remains exposed to upside risks and further confirmation of a potential rate cut in September would enable further upside. Markets are currently pricing in a 90% chance of this happening. That said, we could see FOMC members, including Governor Powell, pushing back on some of the market optimism around rate cuts, in order to instill some caution. If this were the case, we could see gold retrace slightly but the momentum is likely to remain bullish regardless.
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