700 pips downside move in gold

One of the largest moves caused by the unexpected US inflation data has been in gold.

Gold has finally broken through the monumentally important support level of $1,680 and has pushed all the way down to ~$1,660/oz. Gold achieved this huge break to the downside in one four-hour period.

Before this, gold was already feeling the downside pressure, experiencing a drop from ~$1,730 to ~$1,700 in the immediate aftermath of Tuesday’s US inflation data.

Total movement to the downside in gold since Tuesday now sits at around 700 pips.

Gold weakness is being driven by the expectation that the US Federal Reserve will enact a greater-than-expected interest rate hike next week. The markets are currently pricing in the 30% chance that the Fed delivers a 100-basis-points rate hike. For one, ex-Treasury Secretary Larry Summers is calling for a 1% hike.

The markets are now pricing in a 30% chance of a 75-basis-points hike because US inflation subsided less than expected (8.3% vs 8.1% expected) on Tuesday. However, the worst data point is the 0.1% increase in core CPI (excludes volatile energy and food prices), a shocking result after the markets got used to the idea that inflation (in all its measurements) had peaked.

Even so, the more likely option the US fed settles next week, according to the market, is a 75-basis-points rate hike. Although, either option that the Fed takes will likely see demand for the US dollar increase, and with it, more downside potential for gold.

A 50-basis-point rate hike is still on the table though and may be the impetus for a rebound in gold.

Another quality that points to a bright side for gold is the RSI on the 4 hourly chart. After the huge decline that gold has experienced over the past 72 hours, the RSI level is approaching the 20-level, and without a hint of an upturn yet.