Will US Inflation Data Seal the Deal for a September Rate Cut

Spot gold hit levels around $3674, just shy of resistance at $3675, helped in part by additional safe haven bids as news of Israeli strikes on Hamas in Doha hit the wires. Profit taking and a move higher by the USD then saw gold retreat back below $3650, ahead of support at $3624 and $3603. Gold still looks poised for further gains before the year is out whilst economic data continues to make the case for a series of interest rates cuts occurring from the Fed. US inflation data this week could be instrumental in determining whether gold is trading closer to $3700 or $3500 by the end of the week.

As mentioned, US jobs data has arguably already ticked the box as far as the Fed is concerned when making the case for a rate cut, and the upcoming CPI data could make it a slam dunk. Barring any unpleasant upside surprises, that is. If CPI on a year-over-year basis keeps below 3%, that should be enough to keep expectations on track for a rate cut this month. But any upside spikes above 3% could throw a spanner in the works, given the questions it would raise about just how aggressive the Fed could be in cutting rates at the same time as inflation is gaining pace. The CPI data is due Thursday, and ahead of that we will get to see how wholesale prices are performing when the PPI data is released on Wednesday.

In FX, the USD has been weighed down by the sluggish US jobs data and anticipation that Fed rate cuts are on the way. The Dollar Index (DXY) is under pressure below the 98 level, however a mild rebound in treasury yields has lifted the Dollar off its weekly lows. The DXY is currently trading above minor support at 97.40 and below resistance at 98. Ultimately, the inflation data this week will dictate where the USD move to next, with strong figures likely to support the currency while any weakness could hurt it.

OPEC+’s decision over the weekend to again raise production rates in October has hindered the oil price, albeit that the size of the increases (137k barrels per day) is less than in prior months. This factor, combined with geopolitical risks (Russia-Ukraine war continuing, Israeli strikes on targets in Doha) has helped to limit the slide in oil. OPEC+’s decision to prioritise market share over the price per barrel of oil means that the downside bias in the oil market remains, however ongoing geopolitical risks mean that price spikes remain a possibility. Technical levels to watch for US crude this week include support at $61.95, with resistance at $63.23.

Looking ahead, we have an ECB meeting on Thursday, though no change in interest rates is expected, and UK GDP is due on Friday which is expected to show a pullback. But US inflation data is the main event this week, With the major US indices all closing at record highs (on Tuesday), a lot of the current market optimism is premised on the prospect of looser monetary conditions arriving soon. As such, traders will be hoping to see a soft CPI print which could all but seal the deal for a Fed rate cut next week. Though whether inflation cooperates in this regard is another matter.

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