Price of Gold Fundamental Daily Forecast – Set Up for Short Squeeze if CPI Falls Short of Expectations
Gold futures are edging higher on Wednesday, shortly before the release of the major U.S. consumer inflation report at 12:30 GMT. Earlier in the session, the precious metal hit its lowest level since February 11 as a firm U.S. Dollar kept a lid on prices.
Prices likely reversed to the upside as shorts covered positions ahead of the U.S. monthly inflation data, which might impact the Federal Reserve’s monetary policy stance and demand for bullion.
Traders Looking for Signs Inflation is Peaking
Following the increasingly hawkish Federal Reserve’s 50-basis-point rate hike earlier in the month, gold prices have sold off sharply ahead of today’s key U.S. inflation report, which will be closely read for signs that inflation is peaking.
According to Reuters, analysts expect the Consumer Price Index (CPI) to show a sharp pullback in monthly growth, cooling to 0.2% in April from 1.2% in March – the biggest jump in more than 16 years – and an annual increase of 8.1%, 0.4 percentage points lower than the prior 8.5%, which was the hottest reading since December 1981.
Stripping out food and energy prices, so-called “core” CPI is expected to have edged up by 0.4% last month, but cooling to 6.0% from 6.5% on an annual basis.
How Will Gold Traders React to Inflation Drop?
Generally speaking, the consensus among analysts is any sign of a deceleration in consumer inflation would be welcomed by the markets. But what markets are they talking about?
The first place to look is Treasury yields since they set the tone of all markets. A CPI reading showing less than a 0.2% rise could drive Treasury yields lower. This could also drag down the U.S. Dollar.
Since higher yields increase the opportunity cost of holding non-yielding gold and a stronger greenback reduces foreign demand for dollar-denominated gold, a lower-than-expected CPI reading could be supportive for gold prices. How much of a rally it could trigger probably depends on how much the number misses to the downside.
Ahead of the CPI report there is risk to the upside for gold because of the recent liquidation and the large number of shorts in the market. A weaker tone in the CPI report could start a meaningful short-covering rally if the number misses the forecast by enough to fuel a short-squeeze.