Projections for August’s Consumer Price Index (CPI) report suggest that inflation pressures are continuing to ease. On Wednesday, new inflation data for August will be released, with consensus estimates predicting the year-over-year headline CPI to decrease to 2.6%, down from July’s 2.9%. Any figure below this would be positive news for the Federal Reserve, which is nearing its first interest rate cut after aggressively tightening monetary policy when inflation surged to 40-year highs in the spring and summer of 2022.
Now, two years later, with inflation approaching the Fed’s target, investors expect the central bank to shift its focus to the cooling labor market and adjust its policy to prevent a recession. However, two recent jobs reports have come in weaker than expected, raising questions about how aggressively the Fed might cut rates.
Traders are currently pricing in about a 71% chance that the Fed will reduce interest rates by a quarter of a percentage point, lowering the federal funds target rate to a range of 5.00%-5.25%. There's a 29% chance of a more aggressive half-point cut.
As traders turn their focus to this key economic report, gold prices have remained flat after a lackluster Monday session where prices stayed relatively unchanged. Gold has consolidated around $2,500 per ounce, as holders of bullion await potential positive developments.
Looking ahead, gold prices are expected to see some volatility as traders adjust their portfolios ahead of the inflation report. Lower inflation has typically benefited gold, which is seen as a hedge against inflation. This is mainly because lower inflation could lead to larger interest rate cuts, and gold is sensitive to rate reductions, as they decrease the opportunity cost of holding non-yielding assets like gold.
Meanwhile, China’s central bank held off from buying gold for its reserves for the fourth consecutive month in August, according to official data released on Saturday.
In India, gold discounts surged to a seven-week high last week as rising prices dampened demand. Traders and analysts noted that Asian consumers are likely to take advantage of any price declines.
This article was written in cooperation with TradingView