Gold - Inflation Cooled Hard, But the Fed Is Not Convinced Yet

Gold trades near $4,027 today after one of the most interesting sessions in weeks. On Tuesday, US inflation data came in much softer than expected. Headline CPI fell 0.4% in June, the biggest monthly drop since April 2020, bringing annual inflation down to 3.5% from 4.2%. Core inflation, the Fed's preferred measure of the trend, rose just 2.6% over the year against a 2.9% forecast.

Gold jumped more than 1% within minutes. The logic is familiar: softer inflation means less pressure on the Fed to raise rates, and lower rates make gold more attractive.

Traders quickly dropped their bets on a rate hike at the July 28-29 meeting.

Then came the second act. Fed Chair Kevin Warsh testified before Congress about 90 minutes later and pushed against the celebration, saying the improvement is not “mission accomplished” and that the Fed has little patience for high inflation. The dollar recovered part of its losses, and gold gave back some of its gain. First, the data moved the market, then the speech moved it partly back.

Here is the catch that keeps the Fed cautious. June inflation cooled mainly because gasoline prices fell 9.7% that month, when oil was cheap on peace hopes. But oil has already climbed back above $80 on the new Hormuz escalation. In other words, June's soft number describes the past, while today's oil prices are writing a different July.

Today brings round two: US producer prices come out in the early afternoon, and Warsh testifies before the Senate shortly after. A repeat of yesterday's two-way swings is possible.

Gold key levels:

• Resistance: 4,100, then 4,150

• Support: 4,000, then 3,950

Watching: today's US producer price data and Warsh's second day of testimony, oil prices as the key inflation input, the July 28-29 Fed meeting.

By Born2trade market research department

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