US April CPI Key to Gold After Strong NFP

Gold prices are under pressure after Trump rejected the deal with Iran, and strong labour figures for April put the market focus squarely on inflation.

Factors Moving the Market

• After the second consecutive solid NFP, markets are now turning their attention to inflation to guide the Fed's rate outlook.
• New Fed Chair Kevin Warsh is expected to be sworn in as Powell's term ends on May 17, but high inflation is likely to keep rates on hold.
• Gold has lost 11% since the start of the war in the Middle East this year and could remain under pressure as inflation raises the odds of a Fed rate hike.

Fed Doves Running Out of Excuses

Friday's strong NFP report, with job growth in triple digits for the second month in a row, has shifted the narrative for the Fed. Doves had been able to rely on soft labour data to justify pushing for rate cuts, despite inflation remaining elevated and now supported by tariffs and higher energy costs. However, the unemployment rate remaining near the structural level amid a general economic recovery has given hawks additional ammunition. As long as inflation remains well above the Fed's target, the case for holding rates is not only stronger, but the possibility of a hike also grows. Following Friday's jobs data, major brokerages postponed their calls for rate cuts until next year. Combined with the lack of progress in the Middle East, gold prices came under pressure as US yields rose and the dollar strengthened.

Markets still see around a 70% chance that the Fed will keep rates unchanged this year, despite the supposedly dovish Kevin Warsh being expected to be confirmed as Fed Chair on Wednesday and take up the job by next Monday. However, the dissenters' inclination has shifted toward a 30% chance of a hike by December, rather than a cut, indicating the extent of the Fed's hawkish shift. With the jobs market apparently in recovery mode, the pressure is on the Fed to address inflation, as CPI has been above target for more than four years. One of the main issues is whether high energy prices, which are pushing up headline CPI, will translate into rising core rates that would motivate the Fed to act. Tuesday's data is expected to show that consumer prices jumped at an annualised rate of 3.7% in April, up from 3.3% in March. The core rate is expected to be more benign, ticking up to 2.7% from 2.6% previously, but still moving away from the 2.0% target. Also in focus this week are retail sales, because even if prices rise, if demand falls due to declining consumer sentiment, inflation won't persist. US retail sales are expected to decelerate to 0.5% growth from 1.7% in March. However, the prior month's data was likely influenced by stockpiling amid uncertainty over the war in the Middle East.

Gold Struggles Despite Inflation Risk

The risk of inflation and the prospect of the Fed being forced to raise rates above market expectations have weighed on gold prices at the start of the week. Its price has been under pressure since the start of the US-Israeli war on Iran as the dollar has strengthened and the market sees a more hawkish Fed. Bullion could come under more pressure if inflation rises, as expected, as higher yields would outweigh its inflation hedge. On the other hand, if inflation shows less impact than expected due to the energy crisis, gold could be supported as traders become less worried about the possibility of a Fed rate hike.

XAUUSD within BB Range, Signalling Potential Breakout

The 4-hour chart of gold shows a double top at $4770, but the lower end at $4650 has not yet been retested as prices consolidate near the middle Bollinger Band. With both bands flattening out, the markets could be preparing for a breakout towards $4885 or a breakdown towards $4500 if the gold pocket at $4600 gives way to the bears. If the double top confirms, the measured-move projection could open the door to $4530.

Source: SpreadEx | 4-Hour Chart