Price of Gold Fundamental Daily Forecast – Steady as Chances of 75-Basis Point Rate Hike in June Drop

Gold futures are trading higher for a second session on Thursday, following a mixed reaction to the Wednesday’s U.S. Consumer Price Index (CPI) report for April. The report showed there was just enough inflation to keep the Federal Reserve on course to raise rates aggressively, but not enough to trigger an extreme response from central bank policymakers.

At 04:08 GMT, June Comex gold futures are trading $1853.10, down $0.60 or -0.03%. On Wednesday, the SPDR Gold Shares ETF (GLD) settled at $172.83, up $1.41 or +0.82%.

US Consumer Price Index Details

The U.S. Consumer Price Index (CPI) increased 0.3% last month, the smallest gain since last August as gasoline prices fell 6.1% after soaring 18.3% in March. That stood in sharp contrast to the 1.2% month-to-month surge in the CPI in March, which was the largest advance since September 2005. Economists polled by Reuters had forecast consumer prices gaining 0.2% in April.

In the 12 months through April, the CPI increased 8.3%. While that was the first slowdown in the annual CPI since last August, it marked the seventh straight month of increases in excess of 6%. The CPI shot up 8.5% in March, the largest year-on-year gain since December 1981.

Excluding the volatile food and energy components, the CPI accelerated 0.6% after climbing 0.3% in March. The so-called core CPI rose 6.2% in the 12-months through April. That followed a 6.5% jump in March, which was the largest gain since August 1982.

Treasury Yields Slip

The 10-year U.S. Treasury yield is trading below 3% early Wednesday. The yield on the benchmark 10-year Treasury note rose above 3% following the report before settling down 6 basis points to 2.93%. The 30-year Treasury bond dropped nearly 9 basis points to 3.042%.

The move in yields suggests the CPI report was weaker than bond traders had anticipated, causing short-sellers to aggressively cover their positions, and consequently driving yields lower.

Why is Gold Stronger?

June gold futures are trading higher early Wednesday in reaction to the dip in U.S. Treasury yields.

Prior to the release of the CPI report, the gold market was fully-priced for at least a half percentage point increase to the policy rate at each of the next two Fed decisions, on June 15 and July 27, according to the CME FedWatch Tool. The same indicator was also saying the market was 75% confident the Fed would like rates 75 basis points in June.

If the CPI data had come in stronger then the chances of a 75 basis point hike in June would’ve increased and gold prices would have fallen further.

Instead, the odds of a 75 basis point hike dipped a little, driving Treasury yields lower and encouraging gold shorts to book profits and cover some of their positions.

So essentially, the CPI data suggests inflation may have peaked, but was unlikely to cool quick and derail the Fed’s current monetary policy plans. However, the news likely dampened any chances of an aggressive 75 basis point rate hike.

Gold may stabilize as long as the 75 basis point rate hike is off the table, but gains are likely to remain capped because 50 basis point rate hikes in June and July are highly likely.

Conditions could change quickly, however. The May CPI data comes five days before the June Fed meeting, and another “shocker” CPI report would make a 75-basis point hike a strong possibility.