Due to the unexpected decline in the US June CPI, the possibility of the Federal Reserve lowering interest rates was boosted, stimulating a surge in gold prices by nearly $45, breaking through the $2,400 per ounce level.

FXStreet analyst Christian Borjon Valencia pointed out that after the US CPI data opened the door for the Federal Reserve to reduce borrowing costs, gold prices soared above $2,400 per ounce during Thursday's North American trading session, with a daily increase of more than 1.80%.

Spot gold closed up $44.18 on Thursday, a 1.86% increase, at $2,415.22 per ounce; after the release of the US CPI data, the gold price touched a high of $2,424.57 per ounce.

Following the release of the US inflation data, the US dollar fell to a low point of more than a month, making gold priced in US dollars more attractive to holders of other currencies, and the benchmark US 10-year Treasury yield fell to a four-month low.

The US dollar index closed down 0.51% on Thursday, at 104.48; the lowest point during the session was 104.08.

Advertisement

CPI data strengthens expectations for a Fed rate cut

The unexpected decline in US consumer prices in June, and the smallest annual increase in a year, strengthened the view that the downward trend in inflation has returned to the right track, and prompted the Federal Reserve to take a big step towards a rate cut.

The US Department of Labor reported on Thursday that the US consumer price index (CPI) for June decreased by 0.1% month-on-month, the first decline since May 2020, with the market expecting a 0.1% increase; the unadjusted CPI for June in the US increased by 3.0% year-on-year, lower than the market's expectation of 3.1%, and the lowest level since last June.

In addition, the unadjusted core CPI annual rate for June recorded 3.3%, lower than the market's expectation of 3.4%, and the lowest level since April 2021. The seasonally adjusted core CPI monthly rate for June recorded 0.1%, lower than the market's expectation of 0.2%, and the lowest level since August 2021.

The CME FedWatch tool showed that after the release of the US CPI data, the probability of a 25 basis point rate cut by the Federal Reserve in September was 85%, significantly higher than the 70% on Wednesday.The yield on the U.S. 10-year Treasury bond plummeted by 10 basis points on Thursday, reaching 4.187%, which enhanced the appeal of gold.

Since gold does not generate interest, a decrease in interest rates can reduce the opportunity cost of holding gold, increasing its investment attractiveness.

Pepperstone Group's Senior Research Strategist, Michael Brown, stated that the CPI data further suggests that the Federal Reserve may cut interest rates in September.

Analyst Megan Leonhardt indicated that the decline in gasoline prices was a significant reason for the lower-than-expected inflation data in the United States last month. She noted that in June, gasoline prices fell by 3.8% month-on-month. Prior to this, the index had dropped by 3.6% in May.

Steven Ricchiuto, Chief Economist at Mizuho Securities USA, warned of the risks of cutting interest rates too quickly. "All they can do is cut rates within the maximum range predicted by the dot plot, while market pricing may exceed this level."

Federal Reserve Chairman Jerome Powell attended Senate and House committee hearings over the past two days, and his testimony indicated that the Federal Reserve is getting closer to making a decision to cut interest rates.

The gold bull market is not over yet.

New York-based independent metal trader Tai Wong said: "Due to the strong CPI data significantly consolidating the expectation of a rate cut in September, gold prices soared above $2,400 per ounce, and bulls may set a new historical high as early as next week." The spot gold price reached a historical high of $2,449.89 per ounce on May 20th.

OANDA MarketPulse market analyst Zain Vawda believes that, given the overall trajectory of monetary policy and gold demand, the gold bull market is not over yet.On Friday, investors will focus on the U.S. Producer Price Index (PPI) for June and the preliminary value of the University of Michigan Consumer Sentiment Index for July.

How will gold prices move after skyrocketing?

From a technical perspective, FXStreet analyst Christian Borjon Valencia noted that gold prices have resumed a positive upward trend and decisively broke through the neckline of the head and shoulders pattern, rendering this technical pattern ineffective and opening the door for higher prices. The momentum remains on the side of gold buyers, and the Relative Strength Index (RSI) finally shows signs of direction, trending upward.

Valencia stated that the path of least resistance for gold prices is to move upward. The first resistance level for gold prices will be the high point of the year so far at $2,450 per ounce, followed by the $2,500 per ounce threshold.