The US CPI data released delivered a harsh reality check to traders who have had their heads stuck in the cloud in relation to the Fed’s policy. The inflation reading released today has shown that tailwinds have picked up, especially when it comes to headline numbers. There was some silver lining in the wage inflation, which confirmed that wage inflation has started to cool off, and this particular number has brought some lift for the gold traders today. Here is more on this
Background: Gold traders were on the edge.
Going into the most important economic reading today, gold traders have been on the edge, with some on the sidelines as they didn’t want to go big in terms of placing bets on the precious metal. The general consensus in the market was that inflation has been moving in the right direction, which means that it is cooling off from its peak level, and this should provide much more comfort to the Fed, which has been on its toes to manage inflation. The majority of gold traders had their expectations for the Fed to cut rates this year, which would move the dollar index lower, and as the gold price has a negative correlation with the gold price, weakness in the dollar index would move the gold price higher.
The US CPI Number Today
The US consumer price index number, which not too long ago was in double digits, dropped as of the most recent reading to 3.1%. That drop made traders think that the Fed will most definitely cut rates as inflation is moving closer to their target of 2%. However, the number released today came in at 3.4%, against the forecast of 3.2% and the previous reading of 3.1%. The core CPI number stayed the same at a reading of 0.3%.
What to Make of the US CPI Data?
Well, the data sent mixed messages today. Firstly, on the headline side of things, it certainly shows that inflation has started to move in the wrong direction, and this is not what most traders want to see. However, the devil is in the details, and that is that the wage inflation number slowed further, which is very positive for the gold price, and this is the reason that I believe that the gold price will most likely not face a significant sell-off. In fact, there are higher possibilities that we will see the gold price recovering from its losses in the coming days, as the majority will pay attention to the overall picture and not only to the headline number.
What is Next for the Gold Price After the US CPI?
Looking at the daily chart, the price is certainly off the highs of the day as traders react to the headline number. But here are some important factors: the price is trading well off the lows of the day, and it has not broken the lows of yesterday. If there was a real fear about the weakness in the price, then we would have seen the price drop below yesterday’s low. In addition to this, the price is also trading above the 50-day SMA shown in orange, and the price is also trading above the 200-day SMA as well. All of this makes the bull case stronger for the precious metal, while gold traders continue to keep an eye on the important support and resistance levels that are shown on the chart.
