Gold traders are scratching their heads today, unsure of what to make of the latest inflation data and what might count as neutral for the Fed's next move. The numbers are sending mixed signals, and with the odds of a 50 basis points rate cut at the Fed's September 18 meeting dwindling, gold prices are feeling the heat.
Background
Heading into today’s events, traders were holding their breath, hoping for a solid shot of good news on the inflation front. Expectations were already lowered, with inflation trends pointing downwards. Many were betting that today’s data would confirm inflation is no longer public enemy number one and that we're moving closer to the Fed’s 2% target.
The US CPI Data: A Double-Edged Sword
The year-over-year US CPI comfortably beat forecasts, coming in at 2.55% instead of the expected 2.6%. This confirms that the post-Covid inflation surge is in the rearview mirror. For gold traders, this should have been a golden moment, with the Fed’s target of 2% almost in sight. But hold your horses—market reaction told a different story, as traders began scaling back their expectations for a 50 basis points rate cut. They were hoping for a number significantly better than 2.5% to justify such a move.
Why are those hopes fading? Blame it on the Core CPI. The month-over-month reading ticked up from 0.2% to 0.3%, causing a ripple of concern. This spike has thrown a spanner in the works for both gold traders and the Fed, strengthening the dollar and sending gold prices tumbling.
What’s Next for Gold?
Today's market seems to be making a mountain out of a molehill. Sure, there were signs that the Core CPI might inch up, and it did just that. But if you take a step back, the bigger picture of US inflation shows significant improvement. The data paints a picture of remarkable recovery, with inflation now hovering at 2.5%, giving the Fed more room to maneuver than it had just a few months ago. So, let’s not throw the baby out with the bathwater; a 50 basis points cut should still be on the table.
That said, the Fed is unlikely to swing the axe that deeply, fearing it might send the wrong signal to the market. But in my view, they should, as the labor market could use a shot in the arm.
Gold's Path Forward: Between the Devil and the Deep Blue Sea
For gold, the path of least resistance seems to be consolidation, with the critical $2,500 level as the one to watch. The chart below highlights key price points that will be pivotal for gold’s next move.
