Gold Price flying everywhere after US CPI inflation data suprise

• Gold price has been a volatile asset on a mixed day of sentiment in markets.
• US CPI data has been a catalyst for volatility in the financial and commodities pace. 
• The US dollar is sucking up the flow in forex and weighing gold. 

Gold Price (XAU/USD) is higher by 0.4% in the late New York trade on Wednesday. The yellow metal has rallied from a low of $1,707.16 to reach a high of $1,745.42 so far on the day. The outlook is mixed for the yellow metal following a technical move lower that has corrected sharply in North American trade while the fundamentals open up further downside for precious metals and the Federal Reserve will need to remain aggressive at a time when global growth concerns are elevated. 

Gold driver of the day, US inflation, CPI

It has all been about the US inflation report on Wednesday. The US June Consumer Price Index climbed 1.3% MoM, leaving the annual rate at 9.1% YoY. This is much stronger than May’s 8.6% print. The consensus was expectations for an 8.8% lift in prices. However, there was a big jump in last month’s gasoline prices that surged and added 0.5% to the CPI. Analysts at ANZ bank argued that the more worrying aspect of the report was the intensification in core inflation pressures. ''Services, less energy services which account for 57% of the CPI, rose 5.5% YoY.  Outside of volatility in energy prices, inflation pressures are broadening. All items less food, shelter and energy rose 0.8% vs 0.6% MoM in May.'' The data least to the yield curve to invert sharply as the risk of the Federal reserve hiking by 75bps blitz financial and commodities markets. 

US yields invert, Fed expectations are elevated

The US yield curve inverted sharply as CPI inflation in the US exceeded expectations, with the yield on the US 2-year yield now 3.13%, versus 2.91% for the 10-year. The markets now anticipate that the Fed will raise by another 75bps in not only July's meeting, but as far out as September as well.  In fact, analysts at TD Securities note that the market is now pricing in 85bp of hikes in July and 68bp in September.'' We think the Fed will hike 75bp in July and 50bp in September, but see the risk of a 75bp in September. We took off our short 2y Treasury position but remain long 2y TIPS BE and long 30y real rates.'' For gold, which yields nothing for investors, has come under pressure in the face of higher global rates. ''There is no way around it, the Fed has an inflation problem on its hands and the USD will continue to remain king of FX,'' the analysts at TDS argued. 

US dollar sucking up the flows

With US inflation surging to a 40-1/2-year high in June, the US dollar has surged to a 20-year high against a basket of currencies and the euro broke below parity against the greenback for the first time since November 2002. The US dollar smile theory has been in play for many months and the DXY topped at 108.583 on Wednesday for a fresh bull cycle high. The USD tends to strengthen both when the US economy outperforms its peers but also when the US economy is extremely weak, so while there are concerns that the Fed is between a rock and hard place, the greenback would be expected to suck up the flow either way which is a headwind for gold as the Fed will need to remain extremely aggressive at a time when growth concerns are becoming more prominent. ''There is no way around it, the Fed has an inflation problem on its hands and the USD will continue to remain king of FX,'' analysts at TD Securities argued. 

Also read: Gold Price Forecast: Post-CPI recovery stalls below critical resistance

Gold outflows steepest since Covid-19 crisis

The analysts at TD Securities explained that while the steepest outflows from broad commodity funds since the Covid-19 crisis sparked a cascade of selling, including from CTA funds, the strong inflation print could still fuel additional downside. ''Indeed, the still extremely bloated length remaining in gold markets from proprietary traders that was accumulated during the pandemic appears complacent in the face of a steadfastly hawkish Fed. In a liquidation vacuum, these positions are now vulnerable, which suggests the yellow metal remains prone to further downside still.''

Gold Price technical outlook

From a weekly perspective, the price could be regarded as extended and a correction is arguably feasible at this juncture. There is a price imbalance from the current week's highs to the week commencing June 27 low. This area meets a 50% mean reversion and a 38.2% Fibonacci retracement before then. However, the focus in the main is on the downside towards monthly lows as illustrated on the chart above.

Can gold prices hold above $1700 as focus shifts to inflation data?