US PCE inflation data is coming! Gold prices surged nearly $30 overnight. Do short sellers still have a chance?

On Thursday, June 27th, spot gold surged nearly $30 after a sharp drop in the previous trading session, as weak economic data supported expectations that the Federal Reserve will begin cutting interest rates this year, putting pressure on the dollar. On Friday, investors will face the most important economic data of the week—the US PCE inflation data—which is expected to trigger a major market reaction.

Spot gold closed up $29.26 on Thursday, a 1.27% increase, to $2327.30 per ounce.

FXStreet analyst Christian Borjon Valencia pointed out that on Thursday, after the release of US economic data, the US Dollar Index (106.0831, 0.1646, 0.16%) pulled back from its monthly high of 106.13, with gold prices rising by more than 1%.

Weak US economic data weighs on the dollar

Phillip Streible, chief market strategist at Blue Line Futures, said that some of the data released supported the gold market, essentially wholesale inventories were lower than expected, and the final GDP figure was significantly lower, which lowered the dollar index and thus boosted gold prices.

The dollar fell 0.2% against a basket of currencies, and the benchmark 10-year Treasury yield fell to 4.2845%, making gold more attractive to non-dollar buyers.

Data showed a decline in business equipment spending in May, while falling exports pushed up the goods trade deficit, highlighting weakening economic momentum. The US government confirmed a significant slowdown in the final growth figure for first-quarter GDP.

The annualized quarterly growth rate of US first-quarter GDP was slightly revised upward to 1.4%, but this was lower than the 3.4% in the last three months of 2023. The GDP report also showed weak consumer spending. US consumer growth was revised down from a previously predicted 2% to 1.5%.

Helen Given, a foreign exchange trader at Monex USA, said: "The market seems more focused on the decline in personal consumption, which is definitely a sign of a slowdown in the US economy. It was expected that the first-quarter GDP would be below its peak, but the decline in consumption suggests that the economy may slow further."

Data released on Thursday also showed that initial jobless claims fell to 233,000 in the week ending June 22. However, continuing jobless claims increased by 18,000 to 1.839 million in the week ending June 15, the highest level since the end of 2021.

Analysts said that the rise in continuing jobless claims in the US last week to the highest level since the end of 2021 is a warning sign, indicating that it is taking longer for the unemployed to find work, which is not a positive sign for the economy.

Another data point showed that the US pending home sales index unexpectedly fell to a record low in May, as rising mortgage rates and high house prices deterred potential buyers.

The National Association of Realtors (NAR) said on Thursday that the pending home sales index fell 2.1% to 70.8, the lowest level since 2001. The median forecast among economists surveyed by Bloomberg was for a 0.5% increase.

Meanwhile, new orders for US manufacturing unexpectedly fell in May, indicating weaker business equipment spending in the second quarter. Core capital goods orders excluding aircraft and military hardware fell 0.6% month-on-month in May, the largest decline this year. Economists surveyed by Reuters had previously predicted a slight increase of 0.1%.

US PCE inflation data is coming

At 8:30 PM Beijing time on Friday, the US May Personal Consumption Expenditures (PCE) price data will be released, which may reveal the Federal Reserve's interest rate path.

Surveys by authoritative media show that the US May PCE price index is expected to be flat month-on-month, compared to a 0.3% increase in April. The US May PCE price index is expected to increase by 2.6% year-on-year, compared to a 2.7% increase in April.

In terms of the more critical core data, surveys show that the US May core PCE price index is expected to increase by 0.1% month-on-month, compared to a 0.2% increase in April; and the US May core PCE price index is expected to climb 2.6% year-on-year, compared to a 2.8% increase previously.

As the Federal Reserve's preferred inflation indicator, the year-on-year change in the core PCE price index has a significant impact on policymakers.

Analysts point out that the upcoming US May core PCE price index will be a short-term catalyst for market trends.

According to LSEG's "Fed Watch" data, investors largely maintain that there will be about two rate cuts this year, while the Fed is expected to cut rates only once.

Since gold does not bear interest, lower interest rates will reduce the opportunity cost of holding gold, enhancing its attractiveness to investors.

How will gold perform after its sharp rise?

Valencia pointed out that because the head-and-shoulders pattern remains intact, it suggests that gold prices may fall further. Although gold prices rose on Thursday, they have not yet challenged the neckline of the head-and-shoulders pattern. A decisive break above the neckline could negate this pattern and pave the way for gold to test the high of $2368 per ounce on June 21.

Valencia said that the next support level for gold prices will be $2300 per ounce. Once this level is effectively broken, gold prices are expected to fall to the low of $2277 per ounce on May 3, followed by the high of $2222 per ounce on March 21. If these levels are broken, gold prices will fall further, and sellers will target the head-and-shoulders pattern target of $2170-2160 per ounce.

Valencia added that conversely, if gold reclaims $2350, it will look to higher key resistance levels, such as the cyclical high of $2387 per ounce on June 7. Once this resistance is broken, gold prices will challenge $2400 per ounce.