US AUGUST CPI TO SET GOLD OUTLOOK

After the disappointing NFP last week, markets are looking to see if August inflation figures temper or exaggerate the outlook for the Fed's September 17 policy decision.

The Key Developments

• A substantial miss in NFP expectations left the market fully pricing in a 25 bps rate cut at the September meeting and an almost 80% chance of a second rate cut by December.
• The US CPI could moderate some of those expectations, with core inflation in August expected to remain unchanged at 3.1% amid tariff-related price pressures.
• Gold prices have risen rapidly amid increasing expectations of easing, opening the week at a new all-time high.

How Big Will The Cut Be?

On Friday, US NFP came in at just 22K, instead of the 75K that had been predicted, causing the markets at next week's FOMC meeting. Additionally, the market expected at least one more rate cut by December, with a nearly 80% chance of three rate cuts over the coming three FOMC meetings. Interestingly, there is a slight chance (10%) of a 50 bps cut at the September meeting, as the initial appreciation from investors is that the jobs data indicate the US economy is slowing down. The June NFP number was revised lower, to -13K, the first final negative reading since the pandemic. Gold prices jumped to new record highs in the aftermath of the data, as lower interest rates typically support the yellow metal.

What could modify those expectations somewhat is the release of US inflationary data, with PPI coming out on Wednesday and CPI on Thursday. Analysts argue that the Fed has. If inflation remains "sticky", it could be hesitant to cut later in the year. However, if inflation shows signs of decelerating faster than expected, it could lead to an increase in rate cut bets. Last month's CPI showed modest effects from tariffs, and so far this year, the data have not lived up to the fears of tariff-driven increases in consumer prices.

CPI Expected to Accelerate

Last month saw a discrepancy between PPI showing rising wholesale costs, while CPI showed only a modest tariff effect. Economists have cautioned that the lack of price increases among sectors exposed to the new import levies could mean that the inflationary impact of trade taxes can be seen later. The US annual August CPI change rate is projected to step up to 2.9% from 2.7% prior, amid higher natural gas prices. The core rate, which the Fed more closely follows, is projected to remain unchanged at 3.1%. A day earlier, the release of the August PPI is projected to remain unchanged at 3.3% annually, with the core rate anticipated to decelerate to 3.5% from 3.7% a month earlier.

How Far Can the Gold Rush Run?

Gold prices have been on a tear since the third week of August, when Fed Chair Jerome Powell opened the door to a potential rate cut in September during his speech at Jackson Hole. The yellow metal has broken several key barriers, and the RSI has now re-entered overbought territory in the 4H chart, signalling a divergence. If markets move into profit-taking after the latest bump higher, then a return to the $3660 and $3635 (the middle Bollinger Band) per ounce support level is possible. A breakdown could head to the lower BB at $3570. On the other hand, if CPI data increases the chances of further monetary policy easing this year, then gold could break past the psychologically important $3700 level and head towards $3750.

Source: SpreadEx | Gold, Spot