Gold clings to gains ahead of US CPI: can prices keep maintain momentum?

Gold prices clinged on to modest gains on Wednesday as investors waited for the release of US inflation data. 

The yellow metal has fallen sharply after Republican Donald Trump’s victory in the 2024 US presidential elections.

The dollar had surged after Trump’s victory as risk appetite improved, dampening demand for gold and silver. 

On Wednesday, as traders waited for the release of the US inflation data for October, the dollar paused its rally.

This supported prices of gold. 

A stronger dollar makes commodities priced in the greenback more expensive for overseas buyers. 

Moreover, “A generally weaker tone around the equity markets is seen as a key factor offering some support to the safe-haven precious metal through the first half of the European session,” Haresh Menghani, editor at Fxstreet, said in a report. 

Menghani added:

Any meaningful appreciating move, however, seems elusive in the wake of a bullish US dollar.

At the time of writing, the COMEX gold contract was $2,614.40 per ounce, up 0.3% from the previous close. 

US October CPI to rise?

The highly anticipated consumer price index data for October is likely to see an uptick from the previous month in the US. 

“The US Dollar is set to rock on intense volatility likely to be spurred by the US inflation report, which could significantly impact the market’s pricing of the Federal Reserve interest rate outlook for the coming months,” Fxstreet said in a report. 

As measured by CPI, inflation in the US is expected to increase at an annual rate of 2.6% in October, according to FactSet’s consensus estimates. 

This figure would be a tad higher than the 2.4% growth in September.

Analysts with TD Securities, told Fxstreet:

Inflation readings should remain somewhat firmer than the Fed would prefer in the near-term, reversing some recent improvement in the pace of price changes. 

How will CPI influence the dollar?

Trump’s tariff hike plans and tax cuts are expected to feed into higher inflation in the US. 

This is likely to prompt the US Federal Reserve to keep interest rates elevated, which is expected to boost Treasury yields and the dollar as well. 

“Thus, amidst softening labor market conditions and the progress in disinflation, the October inflation report will play a pivotal role in offering fresh hints on the Fed’s next policy move,” Fxstreet said. 

Fed policy in focus

The US central bank last week cut interest rates by 25 basis points.

This followed a super-sized cut of 50 bps in September. 

However, hotter-than-expected inflation in September and subsequent strength in the labour market led to a smaller cut in interest rates at the November Fed policy meeting. 

Markets have now priced in a 62.1% probability of a 25 bps rate cut in December, according to the CME FedWatch tool. 

“Our economists have raised their forecast for the bottom of the US key interest rate by 50 basis points to 4%,” Carsten Fritsch, commodity analyst at Commerzbank AG, said in a report. 

“This means that there should only be two further interest rate cuts by the Fed of 25 basis points each after the expected rate cut in December.”

He further added:

Apparently, market participants are acting after the election according to the principle of ‘buy the rumour, sell the fact. 

Copper slides

Meanwhile, copper futures slid on Wednesday as the market remained underwhelmed by the recent China stimulus package. 

Last week, the People National’s Congress in China approved a $1.4 trillion worth package to finance local government debts. 

The market, however, was expecting a focused spending plan and more clarity on sector wise spending. 

In addition to the generally unfavourable environment, reports of the sharp rise in smelting capacities in China are also weighing on prices.

During January-September, production of refined copper was over 5% higher than in the same period last year. 

Barbara Lambrecht, commodity analyst at Commerzbank, said:

China, which has significantly expanded its capacities in recent years, is now likely to account for half of global supply.

At the time of writing, the three-month copper contract on the London Metal Exchange was $9,118.50 per ton, down 0.3% from the previous close. 

The prices have fallen to levels not seen since the middle of September. 

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