During the US trading session, gold $Gold - main 2412(GCmain)$ prices fell sharply. December gold futures dropped by $29.10 to $2,478.70 per ounce. This decline came despite US CPI data falling below 3%, indicating a slowdown in inflation, which usually supports gold prices.
Typically, easing inflation strengthens expectations for Fed rate cuts, which are positive for gold. The idea is that in a high-interest-rate environment, investors can earn higher risk-free returns from government bonds or high-yield savings accounts, increasing the opportunity cost of holding gold. Lower rates could lead to funds flowing into gold and other markets.
However, if the market has already priced in these expectations, it might react differently in the short term. That's what happened now.
Traders had anticipated the CPI data, leading to a "buy the rumor, sell the fact" scenario, where the positive news turned into a negative reaction. Short-term futures traders took profits, causing gold prices to drop.
On the data front, the US Labor Department reported that CPI rose 2.9% year-over-year in July, marking the fourth consecutive month of slowing growth and coming in below expectations and previous values (both at 3%). Core CPI rose 3.2% year-over-year, the lowest growth since early 2021, matching market expectations. Additionally, PPI rose 0.1% in July, with core PPI unchanged from the previous month.
This week's weak inflation data supports a dovish stance on US monetary policy, with hopes that the Fed will cut rates soon.
According to CME’s FedWatch Tool, there is a 56.5% chance of a 25-basis-point rate cut in September and a 43.5% chance of a 50-basis-point cut. However, Wall Street analysts believe the CPI data is unlikely to prompt a more aggressive 50-basis-point cut.
Despite the data failing to lift gold prices, this week's safe-haven demand provided some support, pushing gold close to its historical highs.
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