Gold (XAU/USD) attracts some buyers after a modest Asian session dip to sub-$4,400 levels. The upside, however, seems limited as traders might refrain from placing directional bets ahead of US inflation figures. The US Producer Price Index (PPI) report will be published later this Thursday, while the US Consumer Price Index (CPI) is due on Friday. The key data will provide more cues about the Federal Reserve’s (Fed) policy path, which, in turn, should influence US Dollar (USD) price dynamics and provide fresh impetus to the non-yielding bullion.
In the meantime, markets are pricing in around a 60% chance that the US central bank will raise borrowing costs at its upcoming policy meeting on September 15-16. The bets were lifted by the better-than-expected US Nonfarm Payrolls (NFP) report last Friday. Moreover, inflation risks stemming from persistently higher energy prices underpin prospects for immediate Fed tightening. In fact, crude oil prices touched a fresh three-month high earlier today as a further escalation of tensions between the US and Iran keeps the geopolitical risk premium firmly in play.
In the latest developments, Iran attacked 10 ships near the Strait of Hormuz after the US announced it had sunk five Iranian oil tankers in the Gulf of Oman and near Kharg Island. This adds to concerns about a prolonged disruption to oil supplies from the Middle East and continues to support the black liquid, which further backs the case for a more hawkish stance from other major central banks. In fact, traders have fully priced in a 25-basis-point (bps) rate hike by the European Central Bank (ECB) later today and by the Bank of Japan (BoJ) at its September 17–18 meeting.
Moreover, the Reserve Bank of Australia (RBA) is also weighing a potential rate increase later this month. Meanwhile, US bond yields remain elevated amid the disappointment from the US Treasury’s announcement that it would buy back up to $6 billion in 10-year to 20-year maturities, up from $2 billion previously. Media reports, however, suggested expectations had been for at least $10 billion. However, a hawkish BoJ-inspired rally in the Japanese Yen (JPY) keeps USD bulls on the back foot, which, in turn, is seen as a key factor that continues to act as a tailwind for the Gold price.
XAU/USD 4-hour chart
Technical Analysis
On the 4-hour chart, the precious metal holds above the 200-period Simple Moving Average (SMA) near $4,362 but remains below the 100-period SMA at about $4,491, leaving the broader tone neutral to slightly capped. Moreover, the 38.2% Fibonacci retracement at roughly $4,427 sits just overhead as immediate resistance. The positive move still appears tentative beneath this nearby ceiling despite a modestly positive Moving Average Convergence Divergence (MACD) reading and a Relative Strength Index (RSI) hovering around 51.
Sustained strength above the said barrier, however, should pave the way for additional gains to the 100-period SMA near $4,491, with the 23.6% retracement up at $4,530 acting as a higher hurdle if buyers gain traction. On the downside, the $4,362 region, where the 200-period SMA aligns above the 50% retracement near $4,344, offers initial support, with deeper cushions at the 61.8% level around $4,260 and the 78.6% retracement near $4,141 if selling pressure resumes.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it.
Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
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