Gold Finds Spark in Weak US Inflation Data, EUR/USD Blasts Off to New 2023 Peak

Gold and EUR/USD Forecast:

• Gold prices clear technical resistance and rise above $1,950 after lower-than-expected US inflation data
• The US dollar is falling as interest rate expectations shift in a less hawkish direction
• Meanwhile, EUR/USD is rising and the handle is above 1.1100, reaching its best level since March 2022.

Most read: The Fed is making progress as inflation slows in the US, and the S&P 500 rises

Gold prices rose sharply and rose more than 1.3% on Wednesday, supported by a weaker US dollar and falling US Treasury yields after lower-than-expected US inflation figures.

According to the US Bureau of Labor Statistics, the annual headline consumer price index came in at 3.0% in June, which is a tenth of a percent lower than the consensus estimate and a significant decline from the 4.0% rate recorded in May. The fundamental gauge also surprised to the downside, printing 4.8% vs. a forecast of 5.0%, in a sign that fundamental pressures are starting to become less firm in response to the increasingly restrictive monetary policy environment.

source: DailyFX Economic Calendar

The encouraging inflation report sparked a pessimistic repricing of interest rate expectations, sending Treasury yields lower across all maturities, particularly at the front end of the curve. Although the odds of a quarter-point rally in July were largely unaffected and remained above 90%, traders dumped their bets on further tightening at the September FOMC meeting, effectively positioning them for what could be the end of The Fed’s Normalization Campaign.

The reaction of the US dollar and earnings to the US CPI report

A market reassessment of the Fed’s path triggered a sell-off in the US dollar, sending the DXY toward its weakest point in nearly 25 months. Against this background, the EUR/USD pair rose more than 1.10%, breaching the 1.1100 barrier and reaching its highest level since March 2022. The GBP/USD pair also managed to make a strong rally, as it came within striking distance of capturing the handle Dodger 1.3000.

Outlook for gold prices

With nominal and real yields turning bearish, gold may rebalance in the near term, but the recovery may be short-lived if incoming data on activity and labor markets remain resilient. For this reason, traders should remain focused on the economic calendar in the coming days and weeks.

From a technical point of view, gold futures rose above the $1,940 barrier after a furious rally on Wednesday, but did not cross its 50-day simple moving average and the general resistance at $1,975. Although the yellow metal might struggle to break above this area, an upside breakout is still possible, and if confirmed, it could open the doors for a retest of the psychological $2000 level.

On the flip side, if sellers regain the upper hand and trigger a turn lower, initial support would emerge at $1,940, followed by $1,907, which is the 38.2% Fibonacci retracement of the November 2022/May 2023 advance. On further weakness, focus will move to $1,880.

Gold futures chart

Gold price chart prepared using TradingView

EUR/USD Forecast

The EUR/USD pair rose on Wednesday, breaching the April-May highs and reaching its best price since March 2022. If this breakout continues in the coming days, the bulls may dare to launch an attack at the psychological level of 1.1200, the next resistance in play. For more strength, we cannot rule out a move towards 1.1375.

On the other hand, if the bullish momentum fades and the pair starts to correct, the first technical support to watch is around 1.1080 area, but there may be additional losses when pushing below this floor, with the next target for the downside 1.1010, followed by 1.0840.

Technical chart of the EUR/USD pair

EUR/USD chart set up using TradingView