Gold prices surged as the US dollar weakened before the release of the PCE data. The price of gold rose by more than 1% following economic data that showed a softer US dollar and lower US Treasury bond yields. The XAU/USD pair was trading at $2,326 after hitting a two-week low the day before.
The US Dollar Index (DXY), which measures the dollar against a basket of other currencies, fell by 0.12% to 105.91 after reaching a monthly high of 106.13. Economic data in the US was slightly better than expected, with GDP for the first quarter of 2024 coming in higher than forecasts. Additionally, the number of Americans filing for unemployment benefits decreased, while Durable Goods Orders exceeded projections.
The Federal Reserve’s preferred measure of inflation, the May PCE, is expected to drop from 2.7% to 2.6% year-over-year. Core PCE is also anticipated to decrease from 2.8% to 2.6% year-over-year.
In other news, Fed officials expressed mixed views on the economy and inflation. Fed Governor Michelle Bowman was hawkish, indicating a willingness to raise rates if inflation remains high. On the other hand, San Francisco Fed President Mary Daly expressed concerns about the labor market and was more dovish. Fed Governor Lisa Cook took a neutral stance, predicting a sharp decline in inflation next year.
According to the CME FedWatch Tool, the odds of a 25-basis-point Fed rate cut in September are at 59.5%, up from 56.3% the previous week. The futures market suggests that the Fed will ease policy by 35 basis points by the end of the year.
From a technical analysis perspective, gold prices remain under pressure as they have not yet tested the Head-and-Shoulders neckline. If the neckline is broken, prices could fall further, with key support levels at $2,300, $2,277, and $2,222. On the other hand, if gold surpasses $2,350, it could target resistance levels at $2,387 and $2,400.
Inflation measures the increase in the price of goods and services over time. Core inflation, which excludes volatile elements like food and fuel, is the figure targeted by central banks. High inflation usually leads to higher interest rates, which can strengthen a currency. Gold, historically seen as a hedge against inflation, may not perform well when interest rates rise due to inflation.
Overall, the market is closely watching the PCE data and the Fed’s next moves regarding monetary policy. Investors should stay informed and conduct thorough research before making any investment decisions.