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Investing.com -- Gold prices fell on Thursday, as precious metal market participants took a bit of a breather after bullion earlier hit a fresh two-month high. The yellow metal has been helped by soft inflation data that has reduced expectations for Federal Reserve rate hikes.
At 16:27 ET (20:27 GMT), spot gold dipped 1.3% to $4,352.23/oz, while gold futures dropped 1.3% to $4,408.09/oz.
Annual producer inflation moderates, similar to consumer print
A day after an in-line July consumer inflation report, investors were focused on producer price readings for the same period.
According to the Bureau of Labor Statistics, the headline July producer price index (PPI) was flat on a M/M basis, while ticking up 4.7% Y/Y. In June, headline PPI had slipped 0.1% M/M and climbed 5.5% Y/Y. The July readings were softer than economists’ expectations.
Meanwhile, July core PPI added 0.2% M/M and 4.2% Y/Y, against estimates of 0.3% and 4.2%, respectively. In June, core PPI had risen 0.4% M/M and 4.7% Y/Y.
With both reports in hand, headline and core CPI and PPI have now moderated on a Y/Y basis. Both indicators are widely followed, but the Fed prefers to track the core personal consumption expenditures (PCE) price index to gauge inflation. Components from CPI and PPI feed into the PCE.
Currency market participants reacted to the data by reducing their expectations for Fed rate hikes. As per the CME FedWatch tool, the odds of a September rate hike slipped to about 34% after PPI, while the odds of the Fed holding rates steady rose to nearly 66%. Lower rate environments tend to boost non-yielding assets such as gold.
"Thursday’s PPI was weaker-than-expected and is more evidence that inflation, while still way above the Federal Reserve’s 2% target, is showing signs of stabilization following the oil-driven surge since the Iran war began earlier this year. This is good news for consumers and the Federal Reserve, which is walking an extremely tight line between trying to tame inflation, while monitoring a softening labor market," Glen Smith, chief investment officer at GDS Wealth Management, said.
"Thursday’s PPI alone doesn’t change the calculus of the Federal Reserve, as the key to taming the inflation picture right now is a resolution in the Middle East or the establishment of pipelines to rely less on the Strait of Hormuz and the Fed has no influence on that. For now, the Fed is likely to keep rates steady through year-end," he added.
Oil snaps six-day win streak
Speaking of the Middle East, oil prices finally lost some steam on Thursday. Brent crude futures, the global benchmark, which had logged a six-day winning run, were last down 2.3% to $86.97 a barrel.
The U.S. and Iran remain at loggerheads over control of the Strait of Hormuz. Both sides have independently asserted their right over the vital waterway, with Washington officials, including President Donald Trump, insisting that the chokepoint is open to commercial ships. However, Tehran has said otherwise, demanding that the U.S. meet conditions including the cessation of all hostilities and the unfreezing of Iranian assets.
Iran’s state media on Thursday said the strait remained under Tehran’s "full control," citing comments made by the Iranian Armed Forces.
"No commercial vessel or oil tanker will be able to transit safely through this strait without Iran’s authorization. U.S. claims are false and constitute psychological warfare,” the Armed Forces said, according to state media.
Traffic through the strait has trickled to its lowest levels since mid-May, according to data from shipping tracker Kpler. Separately, attacks on ships in the Bab el-Mandeb Strait by Iran-backed Houthi rebels in Yemen have exacerbated supply disruption concerns.
Roushni Nair and Scott Kanowsky contributed to this article
