Gold prices continue to rise on weaker U.S. inflation data

Gold prices continued to rise on Thursday, driven by below-forecast U.S. inflation data released yesterday.

On Wednesday, gold saw its strongest intraday gain in over two months, mirroring the decline in the dollar and Treasury yields after the release of U.S. consumer price index (CPI) data for June. The CPI growth was lower than expected, indicating that the Fed’s aggressive interest rate hike cycle may prompt an earlier tapering of its hawkish stance.

A weaker dollar has alleviated the pressure on gold stemming from high-interest rates, which had been a significant weight on the yellow metal this year. The rise in lending rates increases the opportunity cost of holding non-yielding assets like gold.

At the time of writing, spot gold was trading at $1,960.50 per ounce.

Despite the softer CPI reading, inflation remains above the Fed’s target of 2% per annum. Consequently, market expectations include the likelihood of additional rate hikes in the near term, with at least a 25 basis point increase anticipated in the July meeting.

Several Fed officials have also emphasised the potential for further rate hikes in the coming months. They caution that core inflation remains persistently high and poses a risk of becoming entrenched. Although June’s core CPI reading was lower than expected at 4.8%, it still remained relatively elevated, surpassing the headline figure of 3%.

Earlier this year, the Fed had indicated a peak rate of at least 50 basis points above the current 5.25%. However, due to recent weak labor data and the subdued CPI reading, a shift in this stance may occur during the upcoming July meeting.