Gold could witness volatility after release of PCE inflation data

• Gold is likely to witness increased volatility after the US PCE inflation data release on Friday. 
• A lower PCE reading would support the yellow metal as it would, in turn, result in lower interest rates – a benefit to non-yielding Gold. 
• XAU/USD has broken above a key trendline, further invalidating the bearish H&S topping pattern that had been forming.  

Gold (XAU/USD) edges marginally lower, trading in the $2,320s on Friday, ahead of the main economic data event for the week, the US Personal Consumption Expenditures (PCE) – Price Index for May. 

The PCE is the US Federal Reserve’s (Fed) preferred inflation gauge, and since the Fed is in charge of setting interest rates, the result could influence their trajectory. 

Gold is a non-interest-bearing asset so the level of interest rates impacts its value. Higher interest rates make Gold less attractive to investors whilst the opposite is true of lower rates. 

Gold could see volatility from PCE data

Gold will probably experience volatility after US PCE data is released at 12:30 GMT. The consensus estimate is for PCE inflation to fall to 2.6% year-over-year (YoY) in May from 2.7% in April, and to stay unchanged at 0.0% month-over-month (MoM) after rising 0.3% in April.

Core PCE is expected to cool to 2.6% from 2.8% previously on a YoY basis and  0.1% from 0.2% on a MoM basis. 

“Our US economists think that core PCE should increase by +0.17% (MoM), based on the CPI and PPI data that we’ve already got. In turn, that would cut the year-on-year rate to 2.63% (YoY), the lowest in over three years,” says Jim Reid, Global Head of Macro at Deutsche Bank. 

Fed speakers sounding more optimistic

Commentary from Fed speakers regarding the outlook for interest rates also influences Gold prices, and these were mixed on Thursday.

Atlanta Fed President Raphael Bostic said the Fed had started penciling in future rate cuts, which suggests more concrete plans rather than the vague data dependency of previous Fed-speaker comments. 

Bostic expected an interest-rate cut in the fourth quarter as likely followed by four quarter-point cuts in 2025, adding that when the Fed starts cutting rates, it will be the “first in a series; that is a reason for the patience.” 

Bostic also dismissed concerns flagged regarding the weakening labor market, saying, “businesses say they see no cliff ahead for the job market."

Another bugbear for the Fed has been high services-sector inflation. However, there are signs this is also cooling, according to the Atlanta Fed President. 

His colleague, Fed Board of Governors member Michelle Bowman, however, was more cautious on Thursday, saying, “The Fed is not at a point yet where it can consider making a rate cut.”

Market-based gauges of what the Fed will do next are a bit more optimistic, seeing a relatively high circa 64% probability of the Fed cutting interest rates at (or before) the Fed’s September meeting. The estimate is from the CME FedWatch tool, which calculates chances using 30-day Fed Funds futures prices. 

Gold’s longer-term prospects look bright

Gold’s long-term prospects remain positive according to most analysts. Geopolitical uncertainty in the Middle East, Ukraine, from climate change and tech-driven economic challenges, are all risk factors that feed the demand for Gold as a safe haven.    

Gold also has a complex relationship with the US Dollar (USD). Whilst a strong US Dollar is negative for Gold because it is priced in USD, it has also lifted demand from mainly Asian central banks as a hedge against their own currencies’ devaluation against the US Dollar. 

The BRICS trade confederation is also using Gold as a replacement for the US Dollar as the primary medium for global trade. Given its position as a stable, safe store of value, Gold is the most reliable alternative as a means of exchange between nations with different, often volatile domestic currencies. 

“The rest of the world is trying to make sure they're not as dependent on the US Dollar. For them, gold offers another opportunity to hold an asset that is still a pretty significant store of value,” said Joy Yang, Head of Index Product Management & Marketing at MarketVector Indexes, in a recent interview with Kitco News. 

Yang thinks these “global trends” will push Gold higher in the future – back up to  $2,400, although the kicker will be the Fed’s decision to finally begin cutting interest rates. 

Technical Analysis: Gold breaks above trendline, further invalidating H&S

Gold makes another breach of the downsloping trendline that connects the “Head” and “Right Shoulder” of the now invalidated bearish Head and Shoulders (H&S) pattern that formed on the precious metal during April, May and June.

XAU/USD Daily Chart

Although the breaches have invalidated the case for an orthodox H&S reversal pattern forming, it is still possible a more complex “multi-shouldered” topping pattern may have formed that might still prove bearish. Overall, the probabilities are lower, however. 

If the upside trendline break holds, Gold will likely rise to the $2,369 level (high of June 21). A break above that would be an even more bullish sign, with the next target at $2,388, the June 7 high. 

Alternatively, assuming the compromised topping pattern’s neckline at $2,279 is broken, a reversal lower may still follow, with a conservative target at $2,171 and a second target at $2,105 – the 0.618 ratio of the high of the pattern and the full ratio of the high of the pattern extrapolated lower. 

There is a risk that the trend is now sideways in both the short and medium term. In the long term, Gold remains in an uptrend.