- Core CPI seen at 4.3% year over year, slower than July’s 4.7% growth
- Headline CPI growth could drive Dollar Index to 105, gold below $1,900
- If headline inflation comes in weaker, Dollar Index could go to 103, gold $1,948
Last Friday, we cautioned that spot gold, which some investors tend to look at more closely than gold futures, could drop beneath $1,915 an ounce or alternatively run above $1,930.
We reasoned this was because of a tricky U.S. jobs report for August that put the yellow metal at an inflection point while the dollar sat firmly in the driver’s seat instead for the outcome of most risk trades.
Just two trading sessions later, bullion, which determines the spot price of the yellow metal, fell to an intraday low of $1,907.15 on Tuesday as the dollar extended its run-up from early July.
In our technical analysis, this makes spot gold vulnerable to lows of beneath $1,900. This is especially so if the latest U.S. inflation reading — via the Consumer Price Index, or CPI, report for August due today — turns out to be dollar-friendly again.
Inflation and the Fed
The CPI hit four-decade highs of more than 9% per annum in June 2022 due to trillions of dollars of federal relief spending following the 2020 coronavirus outbreak.
The Fed responded with its most aggressive rate hikes in 20 years, going from a base rate of just 0.25% in March 2022 to 5.5%. The Fed’s actions pushed inflation down to 3.0% per annum by June this year. It is from this point that price pressures
While pandemic-related spending is in the rear-view mirror and the CPI has stabilized at around 3% per annum now, a robust labor market has allowed Americans to continue spending, preventing the Fed from achieving its target for inflation.
Fed Chairman Jerome Powell has characterized the labor market's rebalancing as "incomplete." Powell has stressed that getting inflation back down to the central bank’s 2% goal will require "some softening in labor market conditions."
The Fed chief made clear that US rates will follow inflationary pressure.
“We are prepared to raise rates further if appropriate, and intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective,” Powell said.
Most money market traders think the Fed will leave the key US lending rate unchanged at 5.5% at its Sept. 20 meeting. But some think the central bank will likely opt for a 0.25 percentage point increase at its November policy meeting or even that in December.
What Latest CPI Reading Could Bring
At the time of writing, ahead of Wednesday’s scheduled 08:30 ET data release, the U.S. CPI report for August was expected to show an annual growth of 3.6% versus 3.2% in July.
As aforementioned, headline inflation has been rising since a low of 3% per annum seen in June. If forecasts are correct, it has ticked up 0.6% over just two months.
That is certainly not great news for anything other than probably the Dollar Index, which would likely reclaim the high 105 level from the current 104 levels — all on expectations of what the Fed could do with interest rates to temper ramping inflation again.
Gold is almost certain to suffer as a result of any major dollar rally.
But the inflation story isn’t likely to be all too bad, either. Core CPI, a measure of the report that strips out volatile food and fuel prices, is forecast to rise 4.3% year over year in August — slower than the 4.7% seen in July.
While that might be good news to economic watchers, investors still tend to react to parts of the CPI that deliver ‘sticker shocks’ — and, in this case, the headline CPI number will likely get more attention than the core reading. Also, one reason for the wide gap between the two is higher U.S. fuel prices, specifically that of gasoline, seen through August.
Economists at Bank of America say they expect a 5.9% jump in energy prices last month alone to fuel a 0.6% overall increase. They point to data from the American Automobile Association showing retail gasoline prices jumping by 6.6% month over month in August.
The higher gasoline prices come on the back of a more than 20% increase this quarter alone in the price of benchmark Brent crude oil, which hit a 2023 high of above $92 a barrel on Tuesday on a supply chokehold practiced by the Saudis and Russians.
Outlook: Dollar and Spot Gold
Scenario 1: Stronger Dollar/Weaker Gold
If the CPI print comes higher as per consensus, the dollar is supposed to react positively. The Dollar Index can extend beyond 104.50 as the rally will aim to fill up the runaway gap left at 105.
A strengthening dollar is mostly bearish for gold.
Such a scenario can prompt bullion to visit immediate support at the 50-week EMA, or Exponential Moving Average, of $1,899.
If the selling in spot gold extends below $1,899, the next horizontal support zone of $1,885 would be on the bears’ radar.
The major downside potential is seen at the Monthly Middle Bollinger Band of $1,858.
Scenario 2: Weaker Dollar/Stronger Gold
A CPI print lower than consensus is believed to be bearish for the dollar and supportive to gold.
In such an event, the Dollar Index can retrace its way down toward the Daily Middle Bollinger Band of 103.98.
The Dollar Index declining to 103.98 would support spot gold towards its immediate resistance zone, which is the Daily Middle Bollinger Band of $1,918, followed by the 200-day SMA, or Simple Moving Average, of $1,921.
The main challenge for gold bulls would be to reclaim the 50-day EMA of $1,928, which is a turning point for momentum.
Major resistance is seen at the descending weekly middle Bollinger Band of $1,944, followed by the 100-day SMA of $1,948.
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Disclaimer: The aim of this article is purely to inform and does not in any way represent an inducement or recommendation to buy or sell any commodity or its related securities. The author Barani Krishnan does not hold a position in the commodities and securities he writes about. He typically uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables.