Gold Prices Hang on At Highs, Benign US CPI Prompts Rate Rethink

GOLD PRICE, CHARTS AND ANALYSIS:

• Gold prices stay close to one-month highs.
• Weaker US inflation has seen the more extreme rate-hike bets taken off.
• Still, the market looks overbought and further gains may be hard-won.

READ MORE: Fed Making Headway as US Inflation Slows, S&P 500 Edges Higher

Gold prices have extended gains into Europe’s Thursday trading session and remain close to one-month highs as markets digest surprisingly benign official inflation numbers out of the United States in the previous session.

Consumer prices rose by just 0.2% in June, well below expectations, for an annualized gain of 4.8%- the weakest for more than two years. While it’s too early to declare the inflation battle won, a weakening trend is now clear. Consequently, investors are having a little rethink as to how high US interest rates might go and not seeing much more than perhaps two more modest rises this year.

Rate futures now predict a quarter-percentage point rise in the Fed Funds Target Rate in July and a 25% chance of one more similar move before year end. That’s down from around 35% before the data. The prospects of any more half-point rises seem to have diminished markedly.

The chance of lower-than-expected bond yields aheadhas given non-yielding gold a lift, with its strong gains on weaker inflation giving the lie to the idea that the metal functions as an inflation hedge.

Weakness in the US Dollar on the back of the data also gave gold wings. A lower greenback burnishes the charms of Dollar-denominated gold, and gold derivatives, to those holding other currencies.

Spot gold soared more than $30/ounce on Wednesday and remains above $1960 by a whisker in Europe. These are levels last seen in mid-June.

Thursday’s market focus will remain on US inflation, and it’s likely pass-through effects into Fed policy. There’s an official snapshot of producer prices on the slate along with the latest weekly jobless-claim numbers.

Gold Prices Technical Analysis

Gold Daily Chart

Chart Compiled Using TradingView

Prices have broken sharply above their previous, well respected downtrend channel. They did so on Monday when they crossed above $1928.23, which has now been left far below the market.

The obvious question mark after such a sharp rise is over how sustainable it will be and there the news for gold bulls is probably less good. The metal’s Relative Strength Index is heading up to the 60 region which would suggest an overbought market.

Those bulls will need to forge on at least as far as $1989.46, June 1’s intraday high, if they’re going to nail down this week’s rises and bring $2000 back into focus. That looks like a big ask given the lack of likely major trading cues before the end of Friday’s global session. With that in mind, the uncommitted may want to see where prices round out the week before stepping back into this market.

Prices are currently well above their 100-day moving average, which comes in at $1952, which now offers support, ahead of the late-June lows around $1892.

It’s worth noting that IG’s own sentiment data finds the market still extremely bullish, with 62% of traders still coming at it from the long side. It may be that this too suggests that enthusiasm has run too far.

–By David Cottle for DailyFX