Gold recovers after two-week low as softer US CPI boosts Fed outlook

Gold prices recovered strongly across two trading sessions, reversing losses from a sharp sell-off as cooler-than-expected US inflation data reinforced expectations.

The precious metal had come under pressure in the previous session, briefly touching a two-week low as investors refrained from placing large bets ahead of the release of the US CPI data and Federal Reserve Chair Kevin Warsh's congressional testimony.

However, sentiment shifted dramatically after inflation figures came in well below market expectations, triggering a sharp rally in bullion.

Gold recovers after sharp sell-off

In the previous session, spot gold rose 0.3% to $4,013.93 an ounce by 0300 GMT after falling to its weakest level since July 1.

US gold futures for August delivery gained 0.4% to $4,020.80.

The modest recovery came after bullion had fallen nearly 3% on Monday, marking its steepest one-day decline in more than a month.

Investors largely stayed on the sidelines ahead of key US economic data and congressional testimony from Federal Reserve Chair Kevin Warsh.

Softer inflation changes market sentiment

Investor sentiment shifted significantly after the US Bureau of Labor Statistics released its June inflation report on Tuesday.

According to the agency, the Consumer Price Index (CPI) fell 0.4% in June after increasing 0.5% in May.

The reading was considerably cooler than economists' expectations, which had called for a decline of 0.1%.

“This decline in the all-items index was the largest 1-month decrease since April 2020, when it fell 0.8%,” the report said.

On an annual basis, headline inflation rose 3.5% over the past 12 months, easing from 4.2% recorded in the previous month.

The reading also came in below economists' expectations of 3.8%.

Meanwhile, core CPI, which excludes volatile food and energy prices, remained unchanged in June after rising 0.2% in May.

Economists had expected another 0.2% monthly increase.

Annual core inflation slowed to 2.6% from 2.9% reported in May.

Gold jumps toward $4,100

The softer inflation data provided a significant boost to the gold market, as investors viewed the figures as giving the Federal Reserve greater flexibility to leave interest rates unchanged during the remainder of the year.

Gold prices surged nearly $60 immediately after the inflation report was released.

Although bullion remained just below the $4,100-an-ounce mark, the rally marked a sharp reversal from the weakness seen in the previous session.

Spot gold was last trading at $4,087.40 an ounce, up more than 2% on the day.

The rebound effectively erased much of the previous session's weakness, when prices had slipped to a two-week low amid cautious positioning ahead of the inflation release.

The stronger-than-expected recovery underscored how sensitive the gold market remains to US inflation data and expectations surrounding future Federal Reserve monetary policy.

With inflation cooling more sharply than anticipated and both headline and core price pressures easing, bullion found renewed buying interest after a volatile start to the week, pushing prices back toward the key $4,100-an-ounce level.