Gold forecast remains bullish post CPI and FOMC

Gold couldn’t hold onto its post-CPI gains on Wednesday after Powell was a little more hawkish than expected at the FOMC press conference last night. Traders have been a little cautious to buy the dip ahead of today’s key US data – namely, PPI inflation figures, due for release at 13:30 BST. Still, the precious metal remains largely supported having posted record highs in each of the past three months. The fundamental bullish gold outlook remains intact as we near the end of the first half of the year. Inflation continues to be strong in the US, and while it has decreased significantly in Europe and other regions, demand for gold as an inflation-hedge should remain strong.

Gold forecast: inflation hedging demand

Indeed, one of the biggest drivers behind the gold rally has been rising demand for gold as people have attempted to protect their wealth against rising prices, after several years of above-forecast inflation eroded the purchase power of fiat currencies, in some cases significantly. While central banks raised interest rates sharply to combat inflation, gold was able to hold its own well despite higher bond yields providing attractive nominal returns on safe-haven government debt. Now that central banks have started to cut rates, this should make gold even more appealing as yields and the opportunity cost of holding zero-interest bearing metals fall. So, investors and central banks that missed the earlier surge are likely to buy on any dips in gold prices.

Gold forecast: Fed dialling back rate-cut expectations falls on deaf ears

The Federal Reserve scaled back its expectations for interest-rate cuts this year, though Chair Jerome Powell left the door open for additional reductions, noting that the new forecasts were conservative. Policymakers' updated economic projections now anticipate lowering borrowing costs only once in 2024, compared to the three cuts previously expected, according to their median estimate. Despite positive consumer price data that was report earlier in the day on Wednesday, they also raised their inflation forecasts. However, this cautious approach did little to deter bond traders, who continued to bet on rate cuts.

Market expects more rate cuts despite sticky inflation

The market is expecting more than one rate cut despite CPI inflation remaining relatively high at 3.4%, even if it was lower than expected. CPI is continuing to exceed the Fed's target and has now been above 3% for the 38th consecutive month. Additionally, super core CPI, which includes core services inflation minus shelter, rose 5% year-over-year in May to its highest level since last April. This has made the cost of living extremely expensive, especially considering that median US house prices are at a record high of $434,000 and GDP growth has slowed to 1.3% in the first quarter. Alarmingly, there are no plans to address the nearly $35-trillion national debt and rising deficits.

All this add to the bullish argument for holding safe-haven gold.

Gold technical analysis

Source: TradingView.com

Gold remains stuck inside a consolidation pattern but do watch out for the onset of another potential rally now that this week’s Fed meeting and CPI data are out of the way. The bulls would now like to see gold break and hold above short-term resistance at $2330, and ideally above the short-term bear trend line coming in around $2360. Support at $2300 has held firm so far despite a few attempts to break below it. The bulls will take heart from the fact we haven’t seen any bearish follow-through following Friday’s sell-off that was driven by a stronger-than-expected jobs report. That being said, the short-term XAUUSD forecast will turn a little bearish should we now post another daily close below support at $2300. If so, that could then pave the way for further short-term selling towards the next support at $2222.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R