Gold prices climbed on Wednesday following the Federal Reserve's announcement that only one interest rate cut is expected in 2024. Weaker-than-anticipated inflation data also contributed to the increased appeal of the precious metal.
The price of gold rose by 0.35%, reaching $2,340 per ounce, as investors sought a hedge against potential economic instability. The XAU/USD trades at $2,318, reflecting a 0.13% gain.
Weaker inflation data and Fed's Hawkish hold
Inflation data for May showed an annual increase of 3.3%, a slight decrease from April's figure of 3.4%, and below the forecasted rate of 3.4%. Core inflation, which excludes food and energy prices, also fell, decreasing by 0.2% compared to April's increase of 0.3%. Despite this cooling trend, the Federal Reserve's latest economic projections suggest a more hawkish stance, with only one rate cut anticipated instead of the previously expected two or three cuts.
This unexpected shift caught some investors off guard, leading to renewed interest in gold as a safe-haven asset. Gold's appeal was further bolstered by the European Central Bank's recent decision to lower rates at its last meeting, along with expectations for similar moves from other major central banks.
Fed Chairman Jerome Powell's remarks
Fed Chair Jerome Powell stated on Wednesday that they are less confident about inflation than previously anticipated. He mentioned that the Fed is ready to respond if jobs weaken unexpectedly. Powell emphasized that the recent inflation report is just one piece of data and highlighted the need to see the deflation process moving toward the Fed’s goal.
The Federal Open Market Committee's (FOMC) monetary policy statement indicated that the Fed does not anticipate reducing the target range until there is greater confidence that inflation is steadily moving towards 2 percent. Additionally, the Committee stated it would adjust its monetary policy stance if new risks arise that could hinder the achievement of their objectives.
Market volatility and Gold's appeal
The market remains volatile due to conflicting signals from economic data and central bank decisions. However, gold is likely to continue its upward trend in the short term. The Fed's updated dot plot shows a median forecast of 5.00% for the end of 2024, indicating only one quarter-point rate cut is expected this year. The unexpected shift towards monetary tightening from the Fed has raised concerns about the global economic outlook, fueling demand for gold as a safe-haven asset.
In the meantime, gold's short-term technical outlook remains bullish, with strong support at $2,300 per ounce and resistance around $2,400 per ounce. Market participants are closely watching several key data releases scheduled for later in the week, including the US Producer Price Index (PPI) and Jobless Claims reports.
Impact of PPI data on gold prices
Weaker-than-expected PPI data could push gold prices toward $2,350 per ounce, while stronger figures may drive it down to around $2,290. The US dollar index (DXY) fell by 0.6%, boosting the euro by 0.7% following the Fed's policy decision.
The US Bureau of Labor Statistics reported that inflation in May remained steady compared to April, which strengthened gold prices as US Treasury yields declined. The DXY decreased by 0.51% to 104.71, and the yield on the US 10-year Treasury fell to 4.324%. The latest inflation report boosted the likelihood of a Fed rate cut in September from 46.7% to 61.3%.
The Canadian dollar weakened against the US dollar in Asian and European markets due to anticipated divergent monetary policies. Traders should watch crude oil prices, which have been volatile amid geopolitical tensions and supply concerns.
Gold's upward momentum may be limited if oil prices rise, as higher energy costs could reduce demand. Conversely, if oil prices fall, gold may benefit from a weaker US dollar and increased investor demand for safe havens.
The Euro Stoxx 600 index closed higher after the Fed's rate decision, with European shares expected to remain volatile due to political and economic concerns. Easing European political tensions could strengthen the euro against the US dollar, potentially boosting gold prices. The PPI and Jobless Claims reports, key indicators for the US labor market, will be released this week.
Technical analysis and future projections
Gold's outlook remains neutral to bearish after forming a Head-and-Shoulders chart pattern, indicating potential decline. However, the Fed’s decision could reverse this trend if XAU/USD exceeds the June 7 high of $2,387, potentially reaching $2,400.
If XAU/USD falls below $2,300, support levels are at the May 3 low of $2,277 and the March 21 high of $2,222. Further declines could target $2,170 to $2,160.
Gold remains a key hedge against economic instability, with its trajectory closely tied to upcoming central bank decisions and economic data.