Gold rises more than 1% as soft U.S. CPI data prompts easing in rate hike odds

Investing.com -- Gold prices ticked up on Tuesday, helped by a weaker U.S. dollar, with the moves coming after cooler-than-anticipated consumer inflation data prompted traders to pare their expectations of Federal Reserve interest rate hikes. The central bank’s new chief also reiterated a commitment to restoring price stability.

Spot gold rose 1.3% to settle at $4,052.96/oz, while gold futures added 1.3% as well to settle at $4,058.30/oz.

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Consumer prices moderate in June, largely driven by gasoline  

According to the Bureau of Labor Statistics, the headline U.S. consumer price index (CPI) slipped 0.4% M/M, representing the largest one-month decrease since April 2020. Core CPI, which strips out volatile food and energy components, was flat in June after rising 0.2% M/M in May. Economists had expected the headline CPI to fall 0.1% and the core CPI to rise 0.3%.

On a Y/Y basis in June, headline CPI ticked up 3.5% and core CPI increased 2.6%. Both figures were lower than the estimates for a rise of 3.8% and 2.9%, respectively, and decelerated from May.

The deceleration in the headline CPI mainly reflected a slide in gasoline prices, which declined 9.7% M/M in June, the biggest one-month decrease since August 2022. That in turn helped overall energy prices slip 5.7% M/M in June, the largest one-month loss since April 2020.

The fall in gas prices was driven by the U.S. and Iran signing an interim memorandum of understanding (MoU) in mid-June that led to reopening of the Strait of Hormuz, a vital waterway for a fifth of the world’s oil and gas. Improved shipping activity through the chokepoint eased supply concerns and led to Brent crude futures, the global oil benchmark, sliding more than 20% last month.

Inflation dynamics have rapidly shifted this month, however, amid the biggest escalation in tensions between Washington and Tehran since they inked their MoU.

The two sides have exchanged several rounds of strikes over Iran’s reported attacks on commercial oil tankers transiting the strait, while President Donald Trump has reimposed an American naval blockade on the country’s ports and coastline. That move led to Brent surging more than 9% alone on Monday.

Still, the cooler June inflation report gives the Fed some breathing room in terms of tightening monetary policy. As per the CME FedWatch tool, odds of a quarter-point rate hike this year were pared. Lower rate environments tend to boost non-yielding assets such as gold. They also tend to weigh on the dollar, which in turn can buoy bullion as it makes the yellow metal cheaper for foreign buyers.

Meanwhile, Chicago Fed President Austan Goolsbee on Tuesday said that while the June report showed encouraging signs, one month of data was not sufficient to determine if inflation was returning to the central bank’s 2% target. Goolsbee’s comment echoed those of Fed Governor Christopher Waller from the previous day.

Warsh reiterates Fed will deliver price stability

New Fed Chair Kevin Warsh on Tuesday also remarked on the June CPI update, calling it "positive relative to expectations."

Warsh commented at his testimony to the House Financial Services Committee. The hearing comes at a crucial time for the central bank. In June, it held its key policy rate steady at 3.50%-3.75%, but struck a decidedly hawkish tone by guiding for interest rate hikes this year, largely due to inflation running well above its 2% target. Warsh in his public appearances and remarks ahead of the testimony had stuck to that hawkish tone.

"Inflation is a choice," Warsh said in the testimony, adding that monetary policymakers "need to choose lower prices." The new Fed chief reasserted that the central bank would "deliver price stability" through a "function of commitment, responsibility, and tools."

Additionally, Warsh once again pushed back against forward guidance. In June and later in another public appearance, he had said the Fed would stop issuing such guidance moving forward.

"Today’s (CPI) reading alleviates some of the near-term pressure on the Fed to hike. But our tracking estimate for June core PCE (+0.168%m/m) still implies an elevated year-ago reading of 3.3%. Moreover, we still see risks for higher goods inflation ahead given supply chain pressures and tech-price pass-through, and some of the softness in services is likely temporary," JPMorgan analysts led by Maia Crook said.

"This point was reinforced by Chair Warsh in his inaugural semiannual monetary policy testimony, as he noted that today’s print is just one data point and not a sign of mission accomplished. Warsh sounded hawkish about the inflation backdrop — saying the FOMC has ’no tolerance for persistently elevated inflation’ — but when asked, he did not give a clear framework for how he planned to get inflation back to target," the analysts added.

U.S.-Iran escalation keeps a lid on gold’s gains

While gold rose on Tuesday, the advance was capped amid continued fighting between Washington and Tehran.

The U.S. military on Tuesday said it had resumed a naval blockade against ships entering and exiting Iranian ports and coastal areas, hours after President Donald Trump announced the move. Trump earlier said the U.S. will enter into trade and investment deals with Gulf countries instead of getting a 20% reimbursement fee for protecting ships through the Strait of Hormuz.

The president on Monday had first said that the American naval blockade will be reinstated, while also floating the idea of the U.S. being reimbursed for providing protection to ships attempting to transit the Strait of Hormuz.

Trump later told reporters that he was contacted by Gulf nations after his announcement and was urged to scrap the fee.

Vahid Karaahmetovic, Roushni Nair, and Jaiveer Shekhawat contributed to this article