U.S. September CPI Data Set to Be Market Focus: Fed Rate Cut Path and Its Impact on Gold Market

On Thursday,Standard Foreign Exchange Official Website the U.S. Bureau of Labor Statistics will release the highly anticipated Consumer Price Index (CPI) data for September. This report not only provides investors with the latest signal on the U.S. economy but may also influence the direction of future Federal Reserve monetary policy, especially as the market generally expects the Fed to continue cutting rates. As financial markets focus on this report, gold traders will closely monitor its potential impact on gold prices.

Market Expectations for September CPI Data

Economists widely predict that the year-on-year CPI for September will drop from 2.5% in August to2.3%, with a month-on-month increase expected at 0.1%, down from the previous 0.2%. 

The core CPI year-on-year rate is expected to remain at 3.2%, while the core CPI month-on-month rate is forecasted to decline from 0.3% to 0.2%.

The recent decline in inflation is largely attributed to falling oil prices and the gradual exit of previous high CPI readings from the calculation base. However, certain commodities, such as used cars, still face price pressures, leading some analysts to believe that a further drop in the CPI year-on-year rate to 2% is unlikely. In fact, recent increases in oil prices and persistently high housing and transportation costs may impact future CPI data.

Core CPI is considered a better measure of inflation because it excludes the more volatile food and energy prices. As a result, the trend in core CPI often has a more significant influence on market and Federal Reserve decisions. 

If core CPI growth exceeds expectations, it could reignite discussions about the Fed pausing rate cuts or even prompt a more hawkish monetary policy stance.

Diverse Perspectives from Different Institutions

Various institutions have differing views on the upcoming September CPI data, but they tend to be cautious overall.

1. A Bloomberg survey indicates that CPI and core CPI month-on-month growth may register at 0.1% and 0.2%, respectively, aligning with market expectations. If the data meets or falls below expectations, the market may further solidify its outlook for Fed rate cuts.   

2. Jeremy Goff of Palmer Square Capital Management suggests that if CPI exceeds expectations, the Fed may have to take additional measures to ensure a soft landing for the economy.

3. Seamus Smyth, Chief Economist at Virtus Investment Partners, notes that while expectations for rate cuts remain high, if inflation data shows a persistent upward trend, the Fed may be forced to delay rate cuts.

4. BeiChen Lin, an investment strategist at Russell Investments, believes the likelihood of a 25 basis point rate cut in November remains high, but if inflation data surprises on the upside, those expectations may need to be reassessed.

Fed Rate Cut Expectations for November

The release of the CPI data coincides with heightened attention to the Fed's future rate cut path. According to CME's FedWatch tool, the market currently estimates an approximately 88% probability of a25 basis point rate cut in November, while the likelihood of maintaining the current ratehovers around 11%. 

If the CPI data indicates a continued decline in inflation, the Fed's rate cut path will become clearer; conversely, if CPI shows strong performance, the market may reevaluate the potential for rate cuts.

San Francisco Fed President Mary Daly has indicated that the Fed may cut rates one or two more times this year. 

Meanwhile, Boston Fed President Susan Collins emphasizes that future policy should be data-driven.

Ryan Sweet, Chief Economist at Oxford Economics, points out that upcoming economic data, including CPI, will be influenced by oil price fluctuations and weather factors. Rising oil prices and potential impacts from hurricanes may weigh on fourth-quarter GDP growth and affect future inflation expectations.

Impact of CPI Data on Gold Market

Generally, a decline in CPI growth typically suggests an increased likelihood of Fed rate cuts, leading to a weaker dollar and boosting gold prices. Conversely, if inflation pressures rise, the dollar may strengthen, potentially putting pressure on gold prices.

The market broadly expects the September CPI data to show easing inflation pressures, so gold traders should be wary of the possibility of CPI exceeding expectations. If CPI comes in above market expectations, the dollar may rebound, which could pressure gold prices.

Analysts emphasize that gold investors should focus on the core CPI month-on-month performance. If the core CPI month-on-month rate is 0.2% or lower, it could weaken the dollar's performance and boost gold prices. 

On the other hand, if the core CPI month-on-month rate reaches 0.5% or higher, investors may question the Fed's rate cut path, leading to a potential decline in gold prices. If the Fed's monetary policy trajectory is not as accommodating as the market expects, the short-term downside risks for gold could increase.

Gold Price Analysis

In the past week, gold prices have shown signs of weakness, especially after breaking below the crucial support level of $2,632 per ounce, leading to growing bearish sentiment. Technical analysis suggests that gold may face further downside risks in the short term, particularly as prices continue to trade below the 20-day simple moving average (SMA), indicating strengthening bearish momentum.

The current support level is at$2,600per ounce. If this level is breached, prices could further decline to $2,585. However, the Relative Strength Index (RSI) remains above 50, suggesting that bulls still hold hope for a potential rebound. 

If gold prices can reclaim the 21-day SMA resistance at$2,623, the metal could resume an upward trend, challenging short-term highs of $2,650or even $2,670.

Considerations

Heavy economic data releases often prompt quick and intense reactions in financial markets. If the actual numbers deviate significantly from expectations, it could lead to major market volatility. Therefore, traders and investors should pay extra attention to risk management around data releases to avoid unexpected losses.

5. Understanding CPI

- What is CPI?  

CPI, or Consumer Price Index, measures changes in the prices of a basket of goods and services. It reflects the price level of goods and services purchased by households and is a key indicator of inflation. Changes in CPI reveal inflation trends, helping policymakers and investors understand the economy and monetary policy direction.

- Why do traders care about CPI data?  

US CPI data is one of the most critical monthly events, closely watched by global traders, as it can cause volatility in currency, stock, bond, and commodity prices. CPI data offers trading opportunities and potential higher returns, but it also comes with high risks.

For traders, CPI is a crucial indicator of inflation, directly influencing Fed monetary policy decisions. Higher-than-expected CPI data can boost rate hike expectations, strengthening the dollar and pushing down gold and stock prices. Conversely, lower-than-expected CPI data can increase rate-cut expectations, benefiting stocks and gold while weakening the dollar. Hence, CPI data is vital for traders in formulating trading strategies and risk management.

In the hours leading up to the CPI release, traders speculate on how different outcomes might impact financial markets. As the data release nears, trading volume typically increases, with traders closing or opening positions based on their strategies. Once the data is released, markets react sharply; if CPI is much higher or lower than expected, asset prices can change rapidly and continue fluctuating.

However, it’s important to note that during extreme market volatility, price changes can seem erratic, creating “whipsaw” trading conditions. This unpredictability increases trading risks, leading some traders to avoid trading during key news events like the CPI release.

Overall, the release of the US July CPI report will undoubtedly be a pivotal moment in the financial markets this week. Regardless of how the data turns out, it will provide crucial guidance for the Fed's next move and will directly influence market risk sentiment and asset pricing. Investors should closely monitor this data and the subsequent market reactions to make the best decisions in a rapidly changing market.

(This content is for sharing market news and commentary and does not constitute investment advice.)

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