US August PCE Could Shift Odds of Fed Cut

With markets nearly convinced of a rate cut in October, the Fed's preferred inflation indicator could be pivotal in keeping those expectations in line and maintaining support for gold.

The Key Points

• The preferred inflation measure for the Fed is expected to remain unchanged at 2.9%, which would allow expectations for two rate cuts in the final quarter of the year to stay intact.
• Gold prices hit consecutive record highs amid hope that inflation will remain under control and the Fed will continue easing.
• Powell underscored the Fed's need to strike a balance between slower job growth and rising inflation, indicating that rising consumer costs continue to be a primary focus for monetary policy.

Rate Cuts Not a Done Deal

After the last FOMC meeting, markets were gratified to learn that the Fed expected 50 bps (or two cuts) of easing over the next couple of meetings. This weakened the dollar but helped gold push to new consecutive highs. Although, the odds for a cut in December have started to moderate a bit. At three-quarters, the market remains reasonably high. However, the market apparently interpreted comments from Fed Chair Jerome Powell earlier this week as a sign that the FOMC remains concerned about the inflation situation. The Fed's preferred measure for consumer prices has yet to fall back to the 2.0% target since the pandemic surge, and a beat of forecasts for Friday's data might imply it's heading in the wrong direction.

Headline from 2.6% a month earlier. However, the market focuses more on the core rate, which strips out more volatile elements, such as energy and food, and this is expected to remain unchanged at 2.9%. The expected increase is a pivotal point, because a beat of just one decimal will put the inflation rate at the 3.0% level, the highest since January 2024. It could be enough to spook the markets, raising concerns that the Fed will want to hold off on further rate cuts until the trend in inflation turns downward again. Traders will also be examining the components to see if the effects of tariffs are finally starting to be seen, with a focus on vulnerable sectors such as apparel, auto parts, and electronics.

Powell Concerned About the Markets

On Tuesday, the, providing an opportunity for him to address the market's reaction. Although he covered a variety of topics, he made a couple of salient points that could potentially affect the price of gold. First, he noted that the Fed is facing a potential stagflation, highlighting economic weakness and the risk of higher inflation. This could lead traders to seek refuge in safe havens like gold. He also addressed the stock market, pointing out that, which is Fed speak for being concerned with overvalued stocks. That might indicate that equities are ripe for a correction, which could also prompt investors to seek the safety of gold.

Pullback to Gather Momentum for Gold?

Following a month of steady gains, it appears that gold is taking a pause in response to Powell's remarks. The retracement has brought the RSI back from overbought, but it risks falling back below 50 if gold breaks the lower Bollinger Band at $3700. If gold breaks the lower Bollinger Band at $3700, it may find support at the previous support level of $3675, and a breakdown could lead to the swing low of $3640. If gold resumes its upward trajectory, it could face resistance at the prior record high at $3790 before heading toward the psychologically important $3800 and $3850 handles.

Source: SpreadEx | Gold, spot, 4-hour chart