Gold Rallies after Muted U.S. Inflation Data Drives Treasury Yields Lower

The U.S. Dollar recovered against a basket of currencies late in the session on Friday after a weaker than expected consumer inflation report drove prices lower. The muted inflation numbers drove down U.S. Treasury yields which made the U.S. Dollar a less-attractive investment.

It also added to concerns about the Fed’s ability to raise interest rates at the end of the year. Earlier in the week, the newly released minutes of the Fed’s September meeting said central bank members were worried about muted inflation figures.

December U.S. Dollar Index futures settled at 92.935, up 0.37 or +0.04%.

At the end of the session, the financial markets had priced in a roughly 83 percent probability of a rate increase in December, according to the CME Group FedWatch tool.

U.S. Economic Data

According to the Labor Department, the Consumer Price Index jumped 0.5 percent last month after advancing 0.4 percent in August. Traders were looking for a 0.6 percent increase.

Economists said the jump in September was due to soaring gasoline prices after Hurricanes Harvey and Irma caused production disruptions at Gulf Coast area oil refineries.

On Friday, the Commerce Department said U.S. Retail Sales rose 1.6 percent, less than the 1.7 percent traders expected. It was the biggest increase in 2 ½ years.

The retail sales number was lower than expected in September but they were an improvement from the prior month’s 0.2 percent slide.

Preliminary University of Michigan Consumer Sentiment was 101.1, well above the 95.1 estimate.

In other news, U.S. President Donald Trump chose not to certify that Iran is complying with the 2015 Iran nuclear agreement and warned he might ultimately terminate it. This may lead to increased global risk aversion.

Gold

Gold futures rallied on Friday in reaction to the lower-than-expected U.S. consumer inflation report. The catalyst behind the precious metals strength was low inflation’s impact on the pace of U.S. interest rate hikes by the Federal Reserve.

Gold traders said the headline inflation was misleading because it rose largely because hurricanes drove up gas-pump prices. Stripping out the impact of volatile food and energy, Core CPI rose a much smaller 0.1%. Additionally, the recent energy-driven rise in CPI pushed the yearly rate of inflation to 2.2% from 1.9% to match a six-month high.

However, the more closely followed core rate was unchanged at 1.7% for the fifth month in a row and still below the Fed’s 2% target.

Crude Oil

U.S. West Texas Intermediate and international-benchmark Brent crude oil closed at its highest level for the month after China reported strong import data.

Chinese oil imports hit 9 million barrels per day (bpd) in September, data showed. Imports averaged 8.5 million bpd between January and September.

Unrest in Iraq also supported prices. According to reports, Kurdish authorities have sent thousands more troops to the oil region of Kirkuk to confront “threats” from Iraq’s central government.

Finally, oil prices retreated from their highs in relief that President Trump did not immediately seek to impose sanctions on Iran.