Gold is in focus today as trading interest could rise significantly with the latest US CPI (inflation) report released later on Wednesday. The precious metal might have appeared to have been stuck in a range over the last few trading sessions, but technical traders are aware that the ability of Gold to successfully defend $2000 at the end of last week does suggest that buyers remain in control of this asset.
Enthusiasts of Gold would have been happy to see that buyers managed to defend previous psychological resistance at $2000 as support this time around. This provided a pat on the back for those who remain bullish on the precious metal over the longer-term and have remained loyal as well as patient over recent weeks.
Now, the inflation report out of the United States is seen as a key risk because it can provide clarity on where the Federal Reserve stand with future US interest rate expectations. If the market does not get a signal soon from the Fed that lower interest rates can return, temptation will build for profits to be taken from positions.
The Federal Reserve has clearly taken a wait-and-see approach with economic data releases before communicating the next direction of monetary policy. As such, macro releases such as inflation and employment reports are must-see when looking at a potential risk of volatility for an investor portfolio.
How the CPI report might be digested
Due to the Fed’s stance to not provide a narrative on the future outlook of interest rate policy at this moment, what Gold buyers will be hoping for is data showing inflationary pressures are significantly cooling off for the United States economy. This would provide renewed hope that at some point, Fed officials will begin to prepare investors for the eventual return of lower interest rates in the United States.
Looking at the gradual more than 10% incline in Gold prices throughout 2023 so far, it has been a slow burn. Steady goes has been the name of the game for Gold traders. Although for as long as price remains above $2000, buyers are still in control of the precious metal.
What investors need to be prepared for is even if there is an optimistic feeling following the inflation release, it might remain a slow burn for Gold enthusiasts. It might also be digested in a similar way to how the US monthly employment was on Friday last week. That is in a manner of looking at the data through the perspective that higher interest rates appear to be working. Therefore, let’s leave policy where it currently sits before making a decision after more data comes out and is available to analyse over the coming months.
The scenario that has not necessarily been priced in
Looking at the train of thought of allowing the Fed to sit and wait for more upcoming data, what would be a disappointment to momentum of Gold enthusiasts would be is if US inflationary pressures increased last month.
While Gold traders have been holding hope to the narrative that lower interest rates will eventually return, if inflationary pressures are showing signs of unexpected stress then this might present the Fed with a case of considering even higher interest rates in the future.
In this scenario, Gold is at risk of suffering profit-taking to a similar degree to what was encountered on Friday of last week. This current market environment is not necessarily one that supports all assets of safety, therefore sudden shifts in momentum for the Dollar are the highest near-term risk for Gold traders. As is the case with most other global assets.
On a technical level, we must remember how critical psychological resistance was at $2000 throughout the past couple of weeks before it was finally crossed early May. This level is now viewed as support, and it needs to be a stubborn floor in price for the longer-term bullish momentum to continue for Gold.
In the event that $2000 suddenly breaks, sellers will have found encouragement to jump into the market and regain control from buyers. We could then very quickly find ourselves in a scenario where the 10%+ advance in Gold price over the course of 2023 suddenly retraces.
Scenario of persistent inflation cannot be ignored
Taking a brief look away from Gold, what investors should not ignore is the risk that the inflation report today will show that inflationary pressures remain persistently high.
Persistent inflationary pressures would be viewed as potentially the worst outcome to the economic release in a couple of hours from now. It would provide reason to doubt that the Fed is truly done raising US interest rates after raising them at the fastest pace we have seen in a generation.
More importantly for a trader in today’s investment environment, it would present an unexpected opportunity for global assets to sell-off as a result of the USD receiving improved demand.
In this case, any scenario that suggests the Fed may still need to raise US interest rates would likely strengthen the US currency but provide a risk for pretty much everything else.