Gold takes off as FOMC Minutes weighed on USD

• Gold climbs, spurred by weak US economic data and rising Fed rate cut expectations.

• FOMC Minutes: readiness to hike rates if inflation persists, but current policy seen as restrictive.

• ISM shows contracting US services activity; labor market data reveals higher unemployment claims, decreased private hiring.

• Attention turns to Friday's Nonfarm Payrolls, with US markets closed Thursday for Independence Day.

Gold price surged over 1% on Wednesday after softer-than-expected economic data from the United States increased bets that the Federal Reserve (Fed) could cut interest rates by September. In the meantime, the latest FOMC meeting minutes showed that “several participants” were ready to lift rates if inflation remained elevated. At the time of writing, XAU/USD trades at $2,356 above its opening price.

The Fed’s minutes showed that most participants estimated that the current policy is restrictive but had opened the door for rate increases. Policymakers acknowledged the economy is cooling and could react to unexpected economic weakness.

In addition, US business activity in the services sector contracted after hitting its highest level since August 2023, according to the Institute for Supply Management (ISM). This and weaker jobs data, as the number of Americans filing for unemployment benefits rose and private companies hired fewer workers than foreseen, sparked a repricing of Fed interest rate cuts.

Labor market data surprisingly came in softer following Tuesday’s stronger-than-expected JOLTS report. Trader focus shifts to Friday’s Nonfarm Payrolls (NFP) report as US markets will be closed on Thursday due to Independence Day.

Daily digest market movers: Gold shines and climbs on soft US data

• On Tuesday, Powell remarked that the disinflation process has resumed but emphasized the need for further progress before considering any interest rate cuts. He added, “Because the US economy is strong and the labor market is strong, we have the ability to take our time and get this right.”

• US jobs data for June, led by the ADP Employment Change, came in at 150K, missing estimates of 160K and down from May's 157K.

• US Initial Jobless Claims for the week ending June 29 rose to 238K, surpassing estimates of 235K and the previous reading of 234K.

• June's ISM Services PMI dropped sharply to 48.8, its lowest since May 2020 and the fastest decline in four years, signaling recessionary conditions.

• According to the CME FedWatch Tool, odds for a 25-basis-point Fed rate cut in September are at 66%, up from 63% on Tuesday.

• December 2024 fed funds rate futures contract implies that the Fed will ease policy by just 38 basis points (bps) toward the end of the year.

Technical analysis: Gold price fluctuates near Head-and-Shoulders neckline

The Gold price uptrend is set to continue and is testing the neckline of a Head-and-Shoulders chart pattern that has emerged since April 2024.

From a price action perspective, XAU/USD is downwardly biased in the near term, but the overall trend is bullish and is intact. This is further confirmed by momentum as the Relative Strength Index (RSI) is bullish.

If the Gold price clears the pattern’s neckline, that would sponsor a leg up to $2,400 and invalidate the Head-and-Shoulders chart structure. This would pave the way for further gains and expose the year-to-date high of $2,450.

Conversely, if sellers push the spot price below $2,350, further downside is seen near $2,300. If successful, the next demand zone would be the May 3 low of $2,277, followed by the March 21 high of $2,222.  

Inflation FAQs

What is inflation?

Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.

What is the Consumer Price Index (CPI)?

The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.

What is the impact of inflation on foreign exchange?

Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.

How does inflation influence the price of Gold?

Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.