Gold (XAU/USD) pulls back on Friday after a blowout rally on Thursday following the release of US inflation data. The precious metal trades down by almost half a percent to just above $2,400 during the European session as short-term traders take profit or back and fill the previous day’s irrational exuberance. 

Gold breaks out higher after US inflation data release

Gold surged after the release of the US Consumer Price Index (CPI) data for June showed a slowdown in inflation, thereby increasing bets that the Federal Reserve (Fed) will start to cut interest rates sooner than previously thought.  

Markets now fully price in a 0.25% cut of the Fed Funds rate in September and over 0.60% of cuts by the end of the year, from 0.50% previously. This, in turn, increases the attractiveness of Gold as an investment by reducing the opportunity cost of holding a non-interest-bearing investment. 

Thursday’s data showed US headline inflation cooling to 3.0% year-on-year in June, below estimates of 3.1% and the previous month's 3.3%. 

On a monthly basis, CPI fell by 0.1% in June – the biggest outright decline in prices since May 2020 during the Covid-19 pandemic, according to Deutsche Bank’s Global Head of Macro Research, Jim Reid. 

Meanwhile, core CPI – which excludes volatile food and energy components – slowed to 3.3%, falling below expectations of 3.4% from 3.4% previously. On a 3-month annualized basis, moreover, core inflation is now just above the Fed’s 2.0% target.

Hopes were raised “that it wasn’t simply one good month. In fact, on a 3-month annualized basis, core CPI is up just +2.1% now, which is the lowest since March 2021,” said Deutsche Bank’s Reid. 

Thursday’s CPI data – especially for the last three months – suggests the Fed must now be very close to cutting interest rates. When Fed Chairman Jerome Powell was asked by a lawmaker at his two-day testimony to Congress this week whether the Fed would wait until PCE inflation had fallen to its 2.0% target before cutting interest rates, Powell answered that that would be leaving it too late, because “inflation has a certain momentum.” 

This, and Powell’s expressed concerns regarding the state of the employment market, which showed the Unemployment Rate rising to 4.1% in June’s Nonfarm Payrolls figures, might indicate further pressure to cut interest rates – in order to stimulate jobs growth. In fact, Powell said unemployment was the thing “keeping him awake at night”, during his testimony. 

That said, the chances of the Fed cutting rates at its July 30-31 meeting remain low, with September now the first viable date, according to economists at Brown Brothers Harriman (BBH). 

“Even another month of improved inflation data won’t get the Fed to cut this month.  After the July 30-31 meeting, the Fed will see July and August readings for jobs, CPI, PPI, and retail sales and the July PCE reading ahead of the September 17-18 FOMC meeting.  By that point, the Fed should have a much better idea of where the economy is going and will feel more comfortable making an explicit policy pivot,” said Dr. Win Thin, Global Head of Markets Strategy at BBH.