Trade Of The Week: Gold Outlook Hinges On US CPI Data

Gold prices caught our attention on Monday morning after briefly punching above $1930 as the dollar retreated.

Over the last few weeks, the precious metal has been influenced by conflicting forces and this continues to be reflected in the choppy price action. The potent cocktail of themes ranging from Fed hike expectations, global growth concerns, and dollar volatility among others have trapped prices within a wide range.

Bulls and bears remain engaged in a fierce tug of war with a fresh fundamental spark needed to shift the scales of power in one direction. Regarding the technical outlook, gold is still respecting a bearish channel on the weekly charts. However, strong support can be found at $1915 – a level where the 200-day SMA resides. 

This could be an intense week for gold and here are 3 reasons why:

1. US August CPI report

The August US Consumer Price Index (CPI) report published on Wednesday, September 13 will act as a critical piece of information that determines whether the Fed will keep rates higher for longer.

Given gold’s zero-yielding nature, this pending report has the potential to trigger explosive levels of volatility.

Market expectations for US August CPI:

• CPI year-on-year (August 2023 vs. August 2022) to rise 3.6% from 3.2% in the prior month.
• Core CPI year-on-year to rise 4.3% from 4.7% seen in July.
• CPI month-on-month (August 2023 vs. August 2023) to rise 0.6% from 0.2% in the prior month.
• Core CPI month-on-month to remain unchanged at 0.2% from 0.2% seen in July.

Headline inflation is expected to jump thanks to higher energy costs, but all eyes will be on the core CPI figures which are forecast to remain unchanged month-on-month. Ultimately, further signs of cooling inflationary pressures may feed the argument around the Fed concluding its hiking cycle.

It is worth noting that traders are currently pricing in a 7% probability of a 25-basis point hike this month, with this jumping to 44% by November, according to Fed funds futures.

• Gold prices could shine if the inflation numbers print below market forecast, as signs of slowing inflation strengthen the argument around the Fed already finished with hikes in 2023.
• Should the inflation figures print above market forecasts, gold prices are likely to depreciate as expectations rise around the Fed having headroom to hike one time this year.

2. US data dump

After the main course, which is the US CPI report, investors will be dished out more key US economic reports in the second half of the trading week to complete the meal.

All eyes will be on the US retail sales, PPI, initial jobless claims, industrial production, and University of Michigan consumer sentiment which could provide insight into the health of the US economy. When factoring the Fed’s emphasis on data-dependence when it comes to monetary policy decisions, this data dump could trigger dollar volatility – ultimately impacting gold prices.

• Should the overall US economic data print below market expectations, this may weaken the dollar – pushing gold prices higher.
• If overall US economic data prints above expectations, the dollar could receive a boost – dragging gold prices lower.

3. Technical forces

Despite rebounding from the 200-day SMA, gold prices remain trapped within a range on the daily charts with support at $1915 and resistance at $1931 where the 50-day SMA resides.

Gold could be in the process of a technical rebound or pullback with both technical and fundamental forces determining where prices conclude the week.

• A solid daily breakout and close above $1931 could signal a move higher with the next key level of interest found at $1953.
• Should prices slip back under the $1915 support, this may invite bears to attack $1900 and $1885, respectively.