Gold Volatility Expected After PCE, Jackson Hole

Markets are awaiting potential major developments from Jackson Hole, but the Fed's preferred inflation metric coming out ahead of the event could set the tone, particularly for gold.

The Factors that Could Move the Market

• Markets expect Wednesday's data to show high inflation holding as the economy slows, complicating the Fed outlook.
• A Fed rate hike by the end of the year is still seen as likely, but odds have been easing lately, supporting gold.
• Given Warsh's recent hawkish rhetoric, it's unlikely he can be even more hawkish, but there are several ways he can be more dovish.

Gold in Holding Pattern Ahead of Fed

Gold has seen some ups and downs since the start of the week but is largely unchanged as markets appear to be in a holding pattern ahead of the week's two crucial events. First is the Wednesday release of the inflation measure most closely tracked by the Fed: the PCE price index. Markets expect a sharp acceleration in July core PCE to 0.3% from 0.1% in June. However, the annual rate is projected to stay unchanged at 3.3%, keeping pressure on the Fed to raise rates before the year is out. At the same time, a second reading of US Q2 GDP is expected to confirm the marked slowdown to 1.5% from 2.1% in the first quarter. This sets up a clear "stagflation" situation that makes it difficult to predict where monetary policy will go in an environment where the new Fed Chair is taking pains to reduce forward guidance. Ambivalence in the data could drive higher volatility ahead of the week's main event.

Markets will be waiting for Fed Chair Kevin Warsh's speech at the Jackson Hole Symposium, likely on Friday, for better insight into what to expect from future policy moves. The Fed often uses the setting to communicate changes in policy direction, such as the end of a hiking or easing cycle. Futures still suggest at least a 75% chance of a rate hike by the end of the year, but those odds have been easing amid poorer US economic data over the last month or so. If Wednesday's data shows weaker inflation coupled with a downward revision to GDP numbers, the market could expect the Fed not to go through with a hike. Yields would likely ease, and the dollar could weaken substantially, pushing up gold. On the other hand, higher inflation or a higher GDP revision could bring the minutes back into focus, where many policymakers showed favourability towards raising rates given inflation concerns.

What the Market Will Listen For

Since Warsh has substantially reduced the amount of policy outlook the Fed gives, markets will pay more attention to the factors he mentions as areas of concern to gauge where rates might be headed. Lately, he's been quite harsh on inflation, and if PCE shows no sign of easing, he'll likely keep that tone on Friday. If not, the market could interpret it as a dovish sign. Additionally, he might show concern about the labour market and growth rates, which would also likely be seen as a more dovish sign. Given how hard he's been on inflation lately, it's very unlikely he can come across as more hawkish than expected, which could leave the risk balance tilted toward dovishness.

Has Gold Bottomed Out at $4K?

The yellow metal appears to be in a bullish impulse since bottoming out at $4K, though it is currently pulling back from a 3-month high of $4700 per ounce. With all three VWAP lines sloping upwards, only a break of the median line at $4415 could change the course of this trend. However, shorter-term supports lie at the autotrendline near $4500 and the prior peak at $4450. On the other hand, reclaiming the multi-month peak and $4900 could open the door to 5K once again, confirming the recent trendline breakout.

Source: SpreadEx | Gold, Daily Chart