According to data from the US Bureau of Labor Statistics released on Wednesday, inflation in the US jumped in June to the highest level in the last 40 years, amounting to 9.1% (year-on-year) against 8.6% in May and market expectations of 8.8%. At the same time, monthly inflation accelerated from 1.0% to 1.3%. The core consumer price index, which does not regard volatile food and energy prices, although it decreased in June, still exceeded the forecast of economists and came out with a value of 5.9% (against 6.0% in May).
Such a sharp increase in inflation, despite the actions of the Fed, strengthened the expectations of market participants regarding a faster tightening of the monetary policy of the US central bank, which resulted in the continued strengthening of the dollar, well ahead of its main competitors in the foreign exchange market.
The dollar index (DXY) broke through the 108.00 mark at the beginning of this week, and today, dollar buyers on strong US inflation indicators forced the DXY to renew the local multi-year high above 108.45.
Now almost none of the economists doubt that the interest rate will be raised at the Fed meeting on July 26 and 27 by 75 basis points. Moreover, the likelihood that the Fed will immediately raise the interest rate by 0.1% has increased, taking into account yesterday's inflation statistics, especially since yesterday the Bank of Canada had already taken this path (more aggressively raising interest rates), unexpectedly raising its interest rate by 100 bps to 2.5%.
In anticipation of more aggressive actions on the part of the Fed's leadership in relation to curbing inflation, market participants are more actively buying the rising dollar.
Considering also the long-term upward trend in DXY, in which it has been since March 2011, the breakdown of today's local high of 108.47 will be a signal to increase long positions in DXY futures with the prospect of growth towards multi-year highs of 121.29 and 129.05, reached, respectively, in June 2001 and in November 1985.
Taking into account the prevailing mood of investors in the market, who are waiting for further steps by the Fed to tighten its monetary policy, today, after yesterday's attempt at an upward correction, gold prices resumed falling. It does not bring investment income, but is in active demand in geopolitical and economic uncertainty and a protective asset in conditions of rising inflation. However, its quotes are extremely sensitive to changes in the monetary policy of the world's leading central banks, especially the Fed.
When interest rates rise, gold prices usually decrease as the cost of acquiring and storing it increases.
In the current situation, it seems that when assessing the possibility (or necessity) of investing in this precious metal, investors put the Fed's policy first, relegating geopolitical and inflationary risks to the background, also preferring the dollar as a protective tool.
As for the XAU/USD pair, last week, it broke through the important long-term support level of 1746.00, and today it continues to decline towards the strongest support levels of 1687.00, 1682.00, 1668.00. Their breakdown may "push" XAU/USD out of the long-term bull market zone, sending it towards the support levels of 1275.00, 1050.00, the break of which will complete this process.
And from the news for today, market participants will pay attention to the publication at 12:30 (GMT) of weekly data from the US labor market and US producer price indices (PPI), which are likely to confirm the increase in inflation in the US.
