Russell Shor

Given the need to control inflation, the prospect of higher interest rates is a headwind for gold. As such, in our view, the probability of lower prices is the path of least resistance.

The CPI surprise yesterday led to a 3.9% decline in the US30. This plunge puts the index back in its bear zone between the lower blue and red bands. Moreover, the daily stochastic is rolling over (green rectangle). If it drops below 20 and holds (red arrow), a strong bearish momentum will be underlying.

The US interest rate is a crucial driver of financial markets in the current environment. This dynamic is despite the communication out of the ECB. I.e., the chart above shows the US real rate and its correlation coefficient (cc) with the EURUSD. The cc is at -58% and has been robust since the real rate turned positive at the end of April (green dashed line). Therefore, the current upswing in…

Whilst the greenback has pulled back over the last two weekly candlesticks (green square), it has a high correlation coefficient to real rates, at 77%. As such, we are interested in the real rate's reaction to any news release that may impact expected Fed monetary policy, such as today's CPI release.

The ECB has front-loaded and communicated that it is fully determined to do more, but the market may not be buying into the narrative. If the central bank cannot significantly impact Eurozone inflation, the higher rates won't bring inflation down to its target but will adversely affect economic activity.

Initially, the deficit spending and tight monetary policy may add support for GBPUSD. However, PM Truss has also promised to slash taxes, costing £38bn pa. This deficit increase may adversely affect the UK risk premium as gilts feel the pressure, ultimately exerting pressure on GBPUSD.

The real rate has been appreciating since its low in Nov 2021. However, the Fed March statement (red dashed vertical) was the first confirmation of quantitiative tightening (QT). Six weeks later, the real rate turned positive.

The Saudis cut oil production, but the oil markets remain in a downtrend. This weakness is ominous and primarily reflects the demand destruction.

ISM Services came in at its highest level in four months. It printed at 56.9, topping the forecast of 55.4. This beat is a good number, considering the US economy's headwinds - a number over 50 suggests expansion.

The hourly chart on the right is instructive. The EURUSD gapped down on the market open following Gazprom's announcement that it shut off Russia's gas supply to Europe via its Nord Stream 1 pipeline. The EURUSD found support at the S2 pivot.

Lizz Truss is the 56th British prime minister. She beat rival Rishi Sunak, the former chancellor, pledging to tackle the UK's energy crisis. A £100 billion package is being considered to freeze rising energy bills. She has also pledged to cut taxes.