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Gold gains traction on the back of weaker dollar

14 September 2022

The precious’ recent rally from its near year-to-date lows could be attributed to the broader dollar weakness observed in the past week, even though it remains elevated near its 20-year highs, ahead of the highly anticipated US inflation print due out today. However, the shiny metal’s mediocre rally appears to be capped by the prospect of elevated interest rates for prolonged periods of time, hawkish monetary policy stances from central banks across the board, a deepening energy crisis especially prominent in the European continent and widespread fears of economic slowdowns worldwide.

In this report we aim to shed light on the catalysts driving the precious’ metal price, assess its future outlook and conclude with a technical analysis.

Crucial US inflation print due today

The greenback slipped for a fourth consecutive day, ahead of inflation data and all eyes are watching closely at whether the Fed will soften its monetary policy stance. Today, we would like to highlight the release of the US CPI print for the month of August, which will provide a status update on where the inflationary problem stands in the US. According to forecasted data, the month-on-month CPI rate for August is expected to contract by -0.1% compared to the previous month 0% rate, and year-on-year CPI rate again for the month of August, is expected to soften to 8.1% compared with the 8.5% of the previous month.

Should the actual rates meet their respective expectations, we may see the greenback coming under pressure, as the results would imply that the inflationary pressures, even though persistently elevated, have indeed peaked in July, and hence in contrast, the bullion could enjoy a fresh wave of safe haven inflows, due to the negative correlation between the two assets.

On the one hand, the Fed might find the results reassuring, combining that with the resilient employment report results released the previous week and thus opt for a lesser-than-75-basis points rate hike in their September 21st meeting. On the other hand, the market appears to be appraising that the Fed’s work is far from over and despite a possible slowdown of inflation being welcomed, it sees the bank in its next meeting to continue to aggressively hike rates. Furthermore, we must note that currently the FFF imply an 87% probability for a 75-basis points rate hike, as the hawkish comments by Fed Chair Powell and his fellow policy makers appear to have convinced the market that their intentions and determination towards curbing inflation, are serious and their comments are not to be taken lightly.

Thus, we conclude by saying that any upward movements in the precious’ price could be short lived, as we near the Fed’s key interest rate decision on the 21st of September. Finally, even though gold is considered to be a safe bet during times of economic uncertainty, interest rate hikes increase the opportunity cost of holding the bullion.

At this point we would like to highlight that US bond yields seem to be on the rise, thus poising an attractive alternative to the non-interest-bearing yellow metal, hence the capping of its upside. In our assessment gold will continue to be driven by sentiment in the dollar in the short term and odds for gold raising to previous high levels dimmish, given the current state of things. Overall, the hawkish narrative is expected to be showcased once again, since the employment report results point at a rather resilient labour market which in turn allows the Fed to solelyfocus on curbing inflationary pressures and attempt to prevent inflation from becoming deeply entrenched within the economy.


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