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Gold Price Forecast: XAU/USD to Fall Alongside Inflation Expectations

Gold Price Forecast: XAU/USD to Fall Alongside Inflation Expectations

Thomas Westwater, Analyst

Gold Fundamental Forecast: Bearish

  • Gold prices rose more than 1% last week on a red-hot US CPI report
  • However, bullion may reverse course as inflation bets lose steam
  • XAU headwinds are strengthening as central banks tighten policy

Gold prices charged higher for a second week as US CPI headlines charged the yellow metal’s inflation hedging appeal. Prices in the United States rose to 8.5% y/y in March, the highest read since 1981, according to the Labor Department. The core reading, excluding food and energy prices, hit 6.5% for the same period. Those figures also pulled down equity prices on the potential threat of a more aggressive response from the Federal Reserve. The benchmark S&P 500 index shifted lower in the days following.

However, the good times may not last. While inflation is at more than 40-year highs, forward expectations are beginning to ease. This will likely weigh on bullion prices. US breakeven rates – the gap between a Treasury yield and its inflation-indexed counterpart – are used as a market-based measure to gauge inflation. While the 1-year rate received a small boost from the CPI print, the 2-year and 5-year rates fell, indicating that inflation expectations 2 and 5 years out are easing.

Economists see the same. Paul Krugman, Professor of Economics at the Graduate Center of the City University of New York, said “inflation will probably fall significantly over the next few months.” Recent trends in gasoline and oil prices since April started indicate that Mr. Krugman’s thesis is already playing out. Gasoline prices in the United States are down over 5% since April 01, according to AAA.

Moreover, Fed rate hike bets have increased during the same time. Overnight index swaps (OIS) are pricing in a 100% chance of a 50 basis point hike at the May FOMC meeting following last week’s CPI numbers. A flurry of hawkish Fedspeak has also helped boost those bets. Central banks have taken notice. The Monetary Authority of Singapore (MAS), on Thursday, tightened policy in its semi-annual announcement. The Bank of Korea also moved to normalize policy on Thursday. The global shift bodes poorly for gold, being a non-interest-bearing asset. That said, gold prices may be due for a pullback after its recent run.

us breakeven rates, inflation chart, gold

--- Written by Thomas Westwater, Analyst for DailyFX.com

To contact Thomas, use the comments section below or @FxWestwater on Twitter

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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