The Bureau of Labor Statistics reported Thursday that the annual inflation in the U.S. increased in July to +3.2% from 3.0% in June. This growth was slightly more modest than market expectations of +3.3%, and was further offset by a drop in the core figure, to +4.7% from +4.8% the previous month.
Despite this, the dollar still strengthened at the end of Thursday, with its DXY index adding a symbolic 5 points to the closing price of the previous trading day at 102.31.
Inflation data, overall, did not change market participants' expectations regarding the near-term prospects of the Fed's monetary policy. At the moment, the vast majority of economists expect the interest rate to remain unchanged during the September meeting of the U.S. central bank.
Yesterday, immediately after the inflation data was published, San Francisco Fed President Mary Daly told the media in an interview that this consumer price index report is "good news." However, the Fed intends to reduce core inflation. "We will keep a close eye on core inflation, which is an essential component of expenditure, and until significant progress has been made, we need it to return to pre-pandemic levels," Daly said.
Given the heightened attention to the inflation data publication, yesterday's U.S. Labor Department report with weekly figures, which turned out to be mixed, had almost no impact on the dollar's dynamics. The number of initial jobless claims for the reporting week rose to 248,000 from the previous 227,000, while the number of continuing claims dropped to 1,684,000 from 1,692,000 earlier.
After yesterday's publications, the dollar generally remains stable today. As of this writing, its DXY index is near the 102.48 mark, moving towards the nearest resistance level at 102.65. If the positive momentum continues and this local resistance level is broken, the next targets will be 103.00 and 103.27.
Today, market participants are awaiting additional inflation data in the U.S. At 12:30 (GMT), the Bureau of Labor Statistics will release data on producer inflation.
Economists' forecasts here suggest an acceleration of the Producer Price Index (PPI) in July to +0.2% and +0.7% (on an annual basis) from +0.1% previously. In general, higher production costs raise wholesale prices, which ultimately gets passed on to the consumer, increasing inflation. Under normal economic conditions, an increase in this indicator strengthens the dollar. How it will be this time remains to be seen, but we should watch the dynamics of the DXY dollar index.
The dollar will likely receive support at the end of the trading week, especially if the consumer confidence index from the University of Michigan, to be released at 14:00 GMT, also turns out to be strong. The preliminary estimate suggests a slight decline in the indicator, to 71.0 from 71.6 in June. This index is a leading indicator of consumer spending, which accounts for a large part of overall economic activity. It also reflects American consumers' confidence in the country's economic development. A high level indicates economic growth, while a low one suggests stagnation. Previous values of the indicator were: 71.6, 64.4, 59.2, 57.7, 63.5, and 62.0. Overall, the expected value of 71.0 is still high.
It's also worth noting that the yield on the U.S. 10-year government bonds remains above the 4.00% mark, maintaining a positive momentum, providing support to the dollar and putting pressure on gold.
As is known, its quotes are highly sensitive to changes in the parameters of monetary policies of the world's major central banks, primarily the Federal Reserve. Data on GDP, the labor market, and inflation levels are decisive for the Fed when planning its monetary policy parameters. And so far, based on recent statements by Fed leaders and the latest labor market, GDP, and inflation data, there are more reasons in favor of maintaining high interest rates than reducing them. This is a negative factor for gold.
At the same time, with inflation remaining at high levels and ongoing geopolitical uncertainty, the demand for gold will also be sustained.
From a technical point of view, the XAU/USD pair is currently in the zone of key support levels at 1908.00 and 1925.00, which separate the medium-term bull market from the bear market.
Considering that XAU/USD remains in the zone of a long-term bull market, above the support levels of 1800.00 and 1764.00, currently and near these levels, the possibility of starting a new wave of growth for the pair and gold quotes should be considered, hence it's worth looking at buying opportunities. This is especially true if the expected macro data from the U.S. (at 12:30 and 14:00 GMT) turns out to be disappointing (for dollar buyers).