With the announcement of the annual CPI rate without seasonal adjustment in the United States in August, the trend in gold prices has made headlines again. The data shows that inflation in the United States in August rose 8.3% year-on-year, much higher than the market’s expectation of 8.1%. In particular, the core CPI in August surged 6.3% year-on-year, which is also high compared with the market’s consensus estimate of 6.1%. The data shows that the annual CPI rate is still high, and housing and food prices are still rising.
The Fed may maintain its hawkish stance in the future, which is a negative signal for gold investors. The inflation data caused the price of gold, initially hovering around $1,720, to fall sharply. It has now fallen below the $1,700 level, and the bears have won handsomely.
From a macro perspective, the positive factors for the gold market outlook have gradually increased over time, mainly the speculation about the peak of US inflation, which made some gold bulls optimistic. This week, investors' main focus was on the annual US CPI rate in August without seasonal adjustments, the annual US core CPI data excluding seasonal adjustments in August and the US retail sales data for August released on Thursday.
However, the actual results of the US CPI data in August have made investors intensify their bets on the Fed, raising interest rates sharply. Inflation data did not drop as much as the market expected, which is a big negative for gold prices. This also means that the Fed's follow-up hawkish view regarding raising interest rates may persist for some time.
It should be noted that the Fed's hawkish stance can be felt quite strongly in the Fed chair’s latest speech. Powell said, "In order to curb inflation, the Fed may have to maintain the federal funds rate at a high level for a period of time, during which households and businesses will feel some pain." To some extent, the comments dispelled the market's earlier speculation that Fed's policy may change soon.
Furthermore, retail sales data partially reflects the economic situation after the latest US Fed interest rate hikes. Therefore, if the retail sales data does not hit or exceed the market’s expectations, gold may have an opportunity to rally higher, and weak consumer demand will also put pressure on the US dollar. Currently, the monthly retail sales growth rate in the United States in August is expected to be 0.2%, an improvement from the previous value of 0%. As a result, the market is expected to rebound slightly, but there will not be too many positive factors for gold. Therefore, investors have to wait and see if there is a chance for gold prices to pick up or whether they need to wait for the final data.
Last Thursday, the European Central Bank raised interest rates by an unprecedented 75 basis points. If the Federal Reserve raises interest rates by 75 basis points later this month, the cost of holding gold will continue to rise as the attractiveness of the yellow metal diminishes. Therefore, the risk of gold continuing to decline can't be eliminated. Therefore, the market needs to be especially vigilant about whether the US CPI data may rise again after winter and whether the US economy will slow down or decline after the next interest rate hike. Therefore, it is necessary to pay attention to the relevant economic data forecasts. These could be potential unfavourable factors for the future trend of gold prices.
The gold market has accepted that the Federal Reserve may raise interest rates aggressively this month, and the price of gold is expected to remain under pressure before the announcement of the interest rate decision. However, the speculation on the direction of the follow-up policy is still inconclusive. Therefore, it is still necessary to pay close attention to the trend in energy prices because it primarily determines the direction of inflation.
Suppose consecutive months of data consolidate the view that inflation has begun to decline gradually. The US dollar index, approaching a 20-year high, could quickly peak and fall, boosting gold prices since a strong dollar is usually bad for gold prices.