Harmovest Capital Market Focus: U.S. Inflation Hits 4.2%: What's Next for Gold?

Key Highlights

• U.S. inflation remains elevated.
• Bank of Canada keeps interest rates unchanged.
• Gold remains under short-term pressure and continues its corrective trend.

Market Review

U.S. Inflation Rises to 4.2% in May, Driven Primarily by Energy Prices

According to data released by the U.S. Department of Labor, the Consumer Price Index (CPI) increased by 4.2% year-over-year in May, up from 3.8% in April and marking the highest level since April 2023. The rise was largely attributed to ongoing geopolitical tensions in the Middle East and higher energy costs, highlighting energy prices as a key source of inflationary pressure.

On a monthly basis, CPI rose by 0.5% in May, slightly lower than April's 0.6%, suggesting that while energy prices remain elevated, the pace of increase may be moderating.

Core CPI, which excludes food and energy prices, rose 2.9% year-over-year, slightly above the previous reading of 2.8% and in line with market expectations. On a monthly basis, core CPI increased by 0.2%, down from 0.4% in April, indicating that underlying inflationary pressures remain relatively contained.

Key Components

• Airfare prices increased 2.7% month-over-month, suggesting that higher energy costs are beginning to pass through to the services sector.
• Price increases for food, housing, and apparel moderated.
• Auto insurance prices fell 1.7%.
• Prescription drug prices declined 0.9%.
• New vehicle prices decreased 0.3%.

Meanwhile, real wages in the United States declined for a second consecutive month. Inflation-adjusted average hourly earnings fell 0.7% year-over-year, indicating that household purchasing power continues to be eroded by inflation.

Overall, the U.S. economy is currently facing inflationary pressures from multiple sources, including elevated energy prices, trade tariffs, and strong investment demand related to artificial intelligence. Although inflation has risen significantly, many market participants believe energy prices may be approaching a near-term peak. Future developments in the Middle East will remain a key factor influencing energy markets and inflation expectations.

Affected Markets: U.S. Dollar, Gold, U.S. Equities (S&P 500)

Bank of Canada Holds Interest Rate at 2.25%

The Bank of Canada announced that it will maintain its overnight rate target at 2.25%, with the Bank Rate at 2.50% and the deposit rate at 2.20%, in line with market expectations.

The central bank noted that ongoing geopolitical tensions in the Middle East and disruptions to global supply chains continue to weigh on global economic growth while contributing to higher energy prices and inflation. Uncertainty surrounding U.S. trade policies remains another significant risk factor.

Market Sentiment Analysis

Fear & Greed Index

The latest Fear & Greed Index has risen to 54 from the previous reading of 36, indicating a notable improvement in market risk appetite. Investor sentiment is gradually shifting from caution toward optimism.

As markets continue to absorb geopolitical risks stemming from tensions in the Middle East, safe-haven demand has begun to ease, leading capital flows back into risk assets.

Technical Analysis

XAUUSD (Gold)

From a technical perspective, easing geopolitical concerns have reduced demand for gold as a safe-haven asset, leaving prices under sustained pressure.

Gold has broken below both the EMA89 and EMA144 support zones, while short-term moving averages continue to align in a bearish configuration. In addition, price action has formed a bearish "N-shaped" pattern, suggesting that sellers remain in control of the market.

Prices are currently consolidating around the 4557 area. Failure to reclaim key moving average resistance levels could expose gold to further downside risks.

Technical Outlook

• Short-Term Trend: Bearish
• Medium-Term Trend: Bearish to Sideways
• Key Resistance: EMA89 and EMA144 zones
• Key Support: Around 4557

Trading Strategy

Maintain a sell-on-rally approach while monitoring price action near key resistance levels. Traders should remain alert to any resurgence in geopolitical tensions, which could trigger renewed safe-haven demand and support gold prices.