Gold Head & Shoulders Before US CPI

Gold is testing the neckline of a head-and-shoulders top just hours before Friday's US CPI report.

A stronger-than-expected August jobs report has already pushed the odds of a Federal Reserve rate hike next week above 70%, a day after the European Central Bank delivered a hike of its own. A hot inflation print could tip gold through the neckline, though the volatility it brings may tempt bullish traders to buy the dip soon after.

Latest Market Moves

• Gold trades near $4,350, having touched a one-and-a-half-week low in Asian trading on Friday and sitting just above the 200-day EMA at $4,313.

• Odds of a Fed rate hike at Wednesday's meeting have climbed to 70% on the CME FedWatch Tool, up from 62% before Thursday's producer price data.

• August non-farm payrolls came in at 162,000 against a forecast of 56,000, with unemployment holding at 4.1%, reversing the slide in hike bets that followed July's -23,000 miss.

• The European Central Bank raised its deposit rate by 25 basis points to 2.50% on Thursday, its second hike of the year, with President Christine Lagarde calling it “an easy decision.”

• Brent crude holds above $100 a barrel as Iran-linked tensions keep energy prices elevated, which hasn’t even been fully baked into the latest CPI readings yet.

A Much Stronger Jobs Market Changes the Fed Calculus

Friday's CPI report lands against a jobs picture that looks very different than it did a month ago.

July's non-farm payrolls report showed the US economy shedding 23,000 jobs, a miss that briefly knocked the odds of a September hike below 50%. August's report flipped that narrative, adding 162,000 jobs against a forecast of just 56,000 while the unemployment rate held at 4.1%.

Fed Chair Kevin Warsh has kept up hawkish rhetoric on inflation through the summer, and the stronger labour market gives the committee more room to act on it. The September 15-16 meeting was being called a coin flip only a fortnight ago; it looks far less even now.

What’s Expected From August's Inflation Report

Economists expect headline CPI to accelerate to 0.4% month-on-month in August, up from July's 0.1% rise, with the annual rate holding at 3.4%.

Core inflation is forecast to rise 0.4% on the month too, against 0.2% in July, though the annual core rate is seen easing slightly to 2.4% from 2.5%. Thursday's producer price report gave a preview of the pressure building beneath the headline number, with wholesale prices up 5.4% year-on-year on the back of a surge in diesel and energy costs.

A hotter-than-expected core reading would leave the Fed with little excuse to hold rates steady next week.

The Head and Shoulders Comes Down to the Neckline

Gold's chart is telling the same story as the calendar: a decision point.

The pattern's head formed near $4,700, flanked by shoulders around $4,450=54500, with the neckline running through the $4,300 area where price now sits. Momentum has already been fading into the print, with the RSI hovering just below 50.

A CPI number strong enough to cement next week's hike would hand the dollar another leg higher and gold a reason to break that neckline, opening a path toward $4,200 and perhaps the lows at $4000.

Or a Dip Worth Buying?

Not every trader will read a break the same way.

A hawkish surprise tends to bring a burst of liquidity and volatility around the data release, and some bulls might use exactly that spike to buy gold at its cheapest level in a month rather than chase it lower.

A soft CPI number would flip the script entirely, easing the pressure on the Fed and giving gold room to reclaim $4,400 and retest the right shoulder of the pattern.

Source: SpreadEx | Gold, 8-Hour Chart