Gold Plunges to 3-Month Low on Strong Dollar Ahead of U.S. CPI Data

gold coins

On Wednesday, gold prices dropped to a three-month on a firm dollar. The greenback rose to near 20-year peaks and made the bullion more expensive for holders of rival currencies. Another factor that weighs on the yellow is the release of the U.S. consumer price index (CPI) data today at 1230 GMT. Market participants believe that inflation data could influence the Federal Reserve’s monetary policy stance. Analysts forecast a 0.2% decline in CPI in April.

Spot gold is currently trading at $1,849.37 per ounce as of 0751 GMT.

Meanwhile, U.S. central bank officials stood by their arguments for the swiftest series of interest hikes to combat inflation. They are committed to a series of 50-basis-point rate increases, which they believe are needed to slow the fastest inflation in four decades. Cleveland Reserve Bank President Loretta J. Mester acknowledged that it would be painful but a necessary part of tightening credit conditions.

President Joe Biden urged the Fed to tame the price increases because American households are hurting. He wants every American to know that he is taking inflation very seriously and it is his top domestic priority.

Stephen Innes, the managing partner at SPI Asset Management, commented that the rising real yields are driving gold prices down. He explained it supports the dollar despite the decline in nominal yields. The problem for the bullion and other commodities used as an inflation hedge is that the Fed will raise interest rates no matter what.

On the technical front, DailyFX analyst Thomas Westwater said gold prices could fall to yearly low if confluent support breaks. The 200-day Simple Moving Average (SMA) serves as confluent support. If the bullion slips below that level, it could slide down to the 2022 low of $1,778.50. Westwater also noted that gold holdings of exchange-traded funds reflect the bearish sentiment. Total know ETF holdings plunged to their lowest levels since April. He also mentioned that the Relative Strength Index (RSI) is on the brink of oversold territory.

FXStreet senior analyst Dhwani Mehta agreed and added that the Technical Confluences Detector shows that gold is testing critical support at $1,836. She sees the next relevant support level at $1,833 per ounce. The last line of defense for gold bulls is at $1,817.

Mehta noted that the hawkish Fed statement boosted the dollar, which aggravated the decline in gold prices. But she hopes the release of U.S. CPI data later today would give the bullion a fresh price direction.