US July CPI Could Hold Off Fed Hike

Gold prices continue to rise this week amid a complicated geopolitical situation and ahead of key data that could determine whether the Fed hikes in September.

What's Driving the Market

• Odds of a September rate hike fall into the 40s after weaker-than-expected US jobs numbers on Friday.
• The market still believes Warsh's strong rhetoric on fighting inflation, but another soft CPI data print could shake that confidence.
• Gold prices have been rising recently amid increased central bank buying and net inflows into gold ETFs.

Weaker Jobs, But Softer Inflation?

Markets shifted their outlook on the Fed after Friday's surprisingly dismal July non-farm payroll data, allowing gold to reach just under $4,500 per ounce on Monday. The US lost 23K jobs in July, which was further impacted by a combined 103K downward revision to the prior months. This left the market with a more pessimistic view of the economy and dovetailed with the second-quarter GDP underperformance. The data suggests that the job market isn't just turning down. It has been declining for the past five months, which underscores the urgency for the Fed to address the issue. The obstacle is inflation remaining above the Fed's target, but markets may be anticipating that Wednesday's CPI report will be softer than expected, as it has been in previous months. Growing slack in the labour market, particularly in a low-hiring environment as shown by the JOLTS data, would lower inflationary pressure.

Following the data release, expectations for a September rate hike inverted. Before the data, the odds were 60-40 in favour of a hike. Now, those odds are 60-40 in favour of a hold. Traders evidently are not sold on the idea that a softer labour market will prevent the Fed from hiking, given Chair Jerome Powell's strong rhetoric about controlling consumer prices. But if the upcoming CPI data is softer than anticipated, it could substantially move the needle against a rate hike, supporting gold in the process. The consensus is for headline CPI to tick down to 3.4% from 3.5% prior, despite rising gasoline prices as the MOU with Iran fell through last month. The core rate is projected to tick down to 2.5% from 2.6% prior.

Bullion in Recovery Mode?

Traders have been anticipating that the conflict in the Middle East will keep oil prices elevated and push US inflation higher, forcing the Fed to hike rates before the end of the year. However, economists have so far overstated the impact of fuel on inflation, and central bankers note that there has been little pass-through to the broader economy. If there were a repeat of softer inflation data, there would be more room for a dovish surprise. This would likely support gold prices despite the recent gains. The yellow metal got a technical bump after crossing the 100-day MA on Monday but could see further upside as central banks have recently stepped up buying. July saw a return of net flows into gold ETFs, which might indicate the precious metal has finally hit a bottom. On the other hand, if inflation surprises to the upside, the market might forget about the recent jobs data and go back to expecting a September rate hike. After all, NFP data is often subject to significant corrections a month or two later.

Gold Near 2-Month High Ahead of CPI

Given that gold has broken out of and remained above the upper VWAP for consecutive sessions, the breakout has been confirmed. However, prices remain far from the middle line, with a pullback expected towards $4140 if $4200 gives in to potential pressure. Losing the said level would open the door back to the $4K handle, while a bounce would suggest a potential continuation higher. Levels to focus on above the local peak at $4440 are $4500, $4600, and $4780.

Source: SpreadEx | Gold, Daily Chart