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Gold is around 0.5% higher in the $1860 area in wake of US Core PCE data.The data lent support to the idea that inflation is easing, which may remove pressure on the Fed to tighten.

Spot gold (XAU/USD) prices saw a mixed, fairly subdued reaction to the latest US inflation data for April that supported the idea that price pressures might have peaked at the end of Q1. The US dollar and US yields weren’t much changed after the Core PCE Price Index showed the rate of inflation falling to 4.9% YoY in April from 5.2% in March and the MoM rate of price gain remaining unchanged versus last month at 0.3% MoM. Thus, the precious metal didn’t get any cross-asset impulses to drive volatility.

At present, XAU/USD is trading around the $1860 level, up around 0.5% on the day, as the pair continues to derive support from the 21 and 200-Day Moving Averages at $1851 and $1839, as well as from US yields and the buck, both of which are close to/at monthly lows. Gold is currently on course to post a weekly gain of about 0.7%, and has rebounded by about 4.0% from last week’s multi-month lows under $1790.

The latest US inflation data will come as a relief to the Fed and takes away some of the pressure to raise interest rates back to neutral (around 2.5%) quite so rapidly. Though markets still expect 50 bps rate moves at the next two meetings (June and July), the argument for what would be a fourth successive 50 bps hike in September is somewhat diminished.

Meanwhile, if inflation continues to ease back from current levels in the months ahead, the Fed will feel more at ease in pausing rate hikes once it gets back to neutral and reassessing the need for further tightening. If the idea that the Fed won’t need to lift interest rates much beyond neutral starts gaining more traction, this is a downside risk for long-term US yields and also the US dollar, meaning an upside risk for gold.

These will be key themes in the weeks ahead. In the more immediate future, spot gold is likely to remain fairly well supported and may have another run at earlier weekly highs in the $1860s. The upcoming preliminary release of the May University of Michigan Consumer Sentiment survey at 1400GMT will be worth watching for a timely read on how well the US consumer is holding up.

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