Spot gold briefly broke above key resistance on Wednesday, rising more than 1.6% intraday before settling 0.93% higher at $4,408.73 per ounce. This move pushed prices above the 100-day moving average and marked the highest level since early June. US gold futures also gained 0.6%, closing at $4,467.5.
The catalyst was the latest US consumer price index data, which showed a modest 0.1% month-on-month increase, slowing the annual rate to 3.4% from 3.5% in June. Core inflation, excluding food and energy, eased to 2.5% year-on-year. This slightly softer reading prompted markets to lower the probability of a September rate hike to around 40% from 46% before the release, with rate hike expectations declining from nearly 30 basis points to around 26 basis points.
Analysts pointed out that the moderate inflation data, combined with recent signs of a softening labor market, has increased the likelihood that the Federal Reserve will hold rates steady at its September meeting. A less aggressive rate outlook reduces the opportunity cost of holding non-yielding gold, which tends to attract capital in a lower interest rate environment. Marex analyst Edward Meir noted that the encouraging CPI report, a weaker US dollar, and technical factors all contributed to the rally, with the break above the 100-day moving average providing additional confidence for bulls.
Despite the market's diminished expectations for a September hike, divisions within the Fed remain. Nick Timiraos, a journalist with close access to Fed sources, noted that the latest inflation report relieved some pressure for a rate hike next month. However, some officials still see a need to maintain higher rates for longer, while others may join the hawkish camp if incoming data undermines current forecasts. This divergence stems from differing views on inflation drivers, with sticky price pressures from AI-driven demand for equipment and software, alongside persistent external shocks, complicating the outlook. Market attention now shifts to Thursday's producer price index and Friday's retail sales data for further clues on inflation and economic momentum.
Ongoing tensions in the Middle East are adding another layer of complexity. Rather than simply boosting gold through safe-haven demand, the conflict is influencing prices through the oil channel, creating a potential headwind. Talks between the US and Iran over a ceasefire have stalled, with Iranian sources denying any discussions on extending the truce. The number of vessels passing through the Strait of Hormuz, which carries about 20% of global crude, fell to a low of eight on Tuesday, compared to a pre-war daily average of 125-140. This disruption has kept oil prices elevated, with Brent crude closing at $88.98 and US crude at $83.27.
Higher oil prices feed into inflation expectations, which could reignite concerns about tighter Fed policy. Analysts warn that if Iran reblocks the Strait of Hormuz, US inflation could approach 4% in the coming months. Edward Meir cautioned that if hostilities restart and push oil towards $100, interest rates could rise, putting pressure on gold. This dynamic suggests that the Middle East turmoil is currently acting as a risk for gold prices through the oil-inflation-rate channel, rather than a pure safe-haven support.
The US dollar Index rose 0.17% to 99.98, defying expectations of a decline from soft jobs data and moderate inflation. Oil prices and discussions about the Strait of Hormuz appeared to provide some support to the greenback. In the bond market, US Treasury yields were mixed, with the 10-year yield steady at 4.686% and the 30-year yield edging up. Allspring Global Investments strategist George Bory noted that while inflation may have peaked, some core components remain elevated, making it too early to declare victory. He does not expect a rate hike this year but emphasizes that the outlook depends on oil prices and the Middle East situation.
From a technical standpoint, gold has effectively cleared the 100-day moving average. If it can consolidate above $4,400, the metal could have room to extend its gains. The next key level of resistance is around the 200-day moving average near $4,500.
Looking ahead, gold's trajectory will be shaped by a tug-of-war between softer US economic data and the risk of higher oil prices. While the recent rally is supported by reduced rate hike expectations and technical momentum, the potential for a renewed spike in oil prices that reignites inflation fears presents a significant downside risk. The upcoming PPI and retail sales data will be crucial in determining the direction of rate expectations, while developments in the Middle East will continue to influence the oil-inflation dynamic. For investors, the current environment offers opportunities but demands a close watch on both macro data and geopolitical events. The real test for gold may be just beginning, as it navigates the interplay of data, policy, and conflict.
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