GOLD - Peels lower despite soft US Dollar ahead of the Fed

Updated

Gold prices dropped due to weaker US dollar and rising bond yields ahead of the FOMC meeting. The monthly headline CPI for May was 0.1%, lower than the previous 0.4%, resulting in an annual rate of 4.0%, slightly lower than the expected 4.1% and the previous 4.9%.

The core CPI was 0.4% in May, meeting expectations, and 5.3% compared to the same period last year, slightly lower than the expected 5.2% and the previous 5.5%. The significant decrease in the headline rate may be attributed to the exclusion of the 0.9% monthly statistical effect in May 2022 from the dataset.

Note

Looking at the chart above, this result could be mainly due to a decrease in the energy component of the data, which can be seen as an effect due to changes in supply rather than demand.

Note

The Fed’s target of 2% annual inflation is still some way off but by the time the July FOMC gathering rolls around, they will have another set of economic data points to reference.

In any case, swaps and futures interest rate markets are pricing in no change for today but around a 75% chance of a 25 basis point lift at either the July or September meetings.

For gold, the uptick in Treasury yields may have played a role in the weakness seen overnight. The larger gains were seen in the 2- to 10-year part of the curve while the 1-year note remains near 23-year highs.

Additionally, the core component of the inflation data could indicate that some stickiness persists for high CPI. If inflation pressures linger this might see a resumption of a more hawkish Fed in subsequent meetings.

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