Gold Pressured By Fed Hike Odds Ahead of US PCE

The Fed's preferred inflation measure is the focal point for markets after Warsh emphasises controlling consumer prices, raising the odds of a Fed hike and sending gold prices lower.

The Factors Moving the Markets

• Analysts expect the Fed's preferred inflation measure to remain unchanged at 3.3%, supporting the rising odds of a rate hike.
• Markets now price in a 70% chance of a Fed hike by September amid the hawkish pivot.
• Stronger dollar and ETF outflows over the last month have dragged on gold, but a miss in the upcoming data could revitalise the yellow metal.

Markets Pricing in a More Hawkish Fed

Gold has continued its slide, down almost 10% over the last month amid rising US yields, as futures prices reflect rising odds that the Fed will hike soon. Markets now see a 70% chance that the FOMC will tighten at its September meeting, as inflation is expected to continue rising through the summer. While the deal between the US and Iran has helped ease traffic in the Strait of Hormuz, oil shipments have not yet normalised, and WTI is trading above $70 per barrel, with a premium of over $10 compared to pre-war levels. The longer energy prices remain elevated, the greater the risk that inflation will filter through the rest of the economy, necessitating monetary policy action. On the other hand, there are signs of improving conditions, as the average price of diesel in the US fell below $5.00/gal for the first time since March.

On Thursday, the US Core PCE Price Index is expected to remain unchanged, with monthly growth of 0.2% and an annual rate of 3.3%. At the same time, the final reading of US Q1 GDP will be released, expected to confirm an acceleration to 1.6% annual growth from 0.5% in the final quarter of last year. The strengthening economy and high inflation give the Fed room and motivation to hike rates as markets calibrate to the Fed's hawkish shift under new Chair Kevin Warsh. At the last meeting, the Fed raised its inflation outlook for the year, citing projections of higher energy costs. Meanwhile, the US jobs market is recovering, reducing the case for delaying rate hikes, which might otherwise hurt the Fed's second mandate. This growing perception of hawkishness could be derailed if US inflation is softer than anticipated, while a beat in the data could prompt markets to price in a rate hike as soon as the next meeting.

Gold Under Pressure, But Buying Resumes

The stronger dollar over the last month has left gold on the back foot, which was also affected by persistent ETF outflows during the US-Iran war. Now that a deal to reopen Hormuz has been signed, flows have turned positive, but that could be a result of gold falling enough for investors to buy the dip. Whether gold can continue higher depends on the evolution of interest rate expectations and whether energy prices continue to fall. Softer inflation data that pushes the outlook for a Fed rate hike further into the future would likely support gold.

Gold Bounce Could Form Double Bottom

Despite VWAP pointing to the downside, recent price action suggests a bounce, potentially forming a double bottom at $4050-$4100. However, only a break of the median line would support further upside towards the upper band at $4550, with a rejection at $4300 increasing the odds of downside continuation. Losing the $4K handle will expose lower territories, shifting focus to $3750 and $3500 as short-term prices remain below the local swing at $4230.

Source: SpreadEx | Gold, Daily Chart