Before the release of the U.S. PPI data, gold prices are expected to continue their rebound from a three-week low.
Amid concerns over employment, the dollar gave back gains led by the U.S. CPI, with hawkish Fed rhetoric being ignored.
Gold prices have once again found their footing above the 21-day moving average at $2,627, could there be further recovery ahead?
Gold prices are poised to build on gains from a three-week low of $2,604 earlier on Friday. Broad risk aversion and a modest decline in the U.S. dollar (USD) have supported gold prices, with the U.S. Producer Price Index (PPI) data due to be released later on Friday.
U.S. employment worries outweigh inflation concerns, boosting gold prices
Gold prices continue to cheer the possibility of a 25 basis point (bps) rate cut by the Federal Reserve (Fed) in November. According to the FedWatch tool from CME Group, the market currently estimates about an 86% chance of this happening next month.
The health of the U.S. labor market remains a concern for investors after the number of initial jobless claims surged by 33,000 to a seasonally adjusted 258,000 in the week ending October. The disappointing U.S. employment data overshadowed the red-hot Consumer Price Index (CPI) inflation data for September, keeping hopes for a rate cut in November alive.
The annual U.S. CPI inflation rate fell to 2.4% in September from 2.5% in August, the lowest level since February 2021, but still above the estimated 2.3%. The CPI rose 0.2% month-on-month in September, matching the increase in August and higher than the expected 0.1%.
As a result, the dollar failed to maintain its recovery momentum due to a plunge in short-term two-year U.S. Treasury yields, and fell from a two-month high against major competitors. This helped gold prices rebound from a multi-week low.
The dollar's retreat was partly driven by a slide in the dollar/yen, with hawkish remarks from Bank of Japan (BoJ) Deputy Governor Ryozo Himino, who said on Thursday, "If the economic activity and price prospects outlined in the July report are realized, the Bank of Japan will raise interest rates accordingly."Later on Thursday, Atlanta Federal Reserve President Raphael Bostic's slightly hawkish comments failed to buoy sentiment around the US dollar, leaving the currency at a disadvantage ahead of Friday's US PPI inflation data.
In an interview with The Wall Street Journal (WSJ), Bostic stated that he would be "entirely comfortable" skipping a rate cut at the upcoming US central bank meeting. He added that the "volatility" in recent inflation and employment data might necessitate keeping interest rates on hold in November.
The dovish sentiment surrounding expectations for a Federal Reserve rate cut could be tested in the US PPI report, which will significantly impact the value of the US dollar and gold prices. The US PPI is expected to ease to 1.6% year-on-year in September, while the annual core PPI inflation rate for the same period is forecast to rise to 2.7%, up from the previously reported increase of 2.4%.
Gold prices may continue to find support due to increasing market optimism about a Chinese fiscal stimulus package to be launched on Saturday. Meanwhile, several speeches by Federal Reserve policymakers will also keep gold traders engaged.
Gold Price Technical Analysis: Daily Chart
On Thursday, buyers refused to give up, re-entering the game even after gold prices closed below the key 21-day simple moving average (SMA) support level on Wednesday (at the time $2,619).
On Thursday, gold prices reclaimed the 21-day SMA support turned resistance at the daily closing price, currently at $2,628, resuming the uptrend.
The 14-day relative strength index (RSI) is pointing upwards above the 50 level, indicating more room for upward movement.
The next bullish target for gold prices is at the psychological threshold of $2,650 and the intermittent high near $2,670.On the downside, the immediate support lies near the three-week low around the $2,600 threshold. A sustained break below the latter could extend the downside to the low of September 20 at $2,585.
Further declines might challenge the demand area at $2,550, where the 50-day SMA aligns.