🟡Gold Rebounces Ahead of CPI

Today's US CPI inflation reading is likely the most important macro release of this quarter. The Federal Reserve meeting, for which we still have high expectations regarding a potential rate hike, takes place next week on September 15 and 16. Fed members, led by Governor Christopher Waller, openly state that their decision depends on whether today's data shows progress in disinflation. The market has long been pointing to hikes, but a lower-than-expected reading could delay this move at least until after the midterm elections.

What Does the Market Expect?

• Market consensus points to headline inflation at 3.4% YoY, exactly the same as in July.
• Core inflation is expected to fall to 2.4% YoY, indicating that high energy prices do not yet have a strong second-round effect.
• The market expects monthly inflation to grow by 0.4% MoM and 0.2% MoM for the core reading.
• The 1-year inflation swap currently sits at 2.37%, but has clearly bounced back from low levels below 2% last month.

What interesting insights do forecasts reveal? Annual core inflation is projected to drop to its lowest level since March 2021, while headline inflation is expected to remain elevated at 3.4%. This is a direct consequence of the energy shock following the outbreak of the war with Iran. Gasoline prices rose 4.5% MoM in August (after falling 2.9% in July), which will add about 16 basis points to the headline reading according to Bloomberg Economics calculations. Fuel-related inflation is currently the main driver of the elevated CPI indicator.

Outside of fuel, the rest of the basket remains relatively calm. Shelter costs continue to be the main contributor, though they are systematically slowing down.

Why This Reading Is Exceptionally Hard to Price In

The Fed doesn't look at CPI, but rather at the PCE deflator, which won't be published until September 30. The problem is that the exact same CPI data can yield drastically different PCE inflation readings depending on the breakdown of the report:

• A strong CPI driven by goods alongside cool services could result in a PCE reading that is lower than CPI.
• A weaker CPI, but with strong categories carrying heavy weight in PCE (software, recreational services), could result in PCE coming in higher than CPI.

Nonetheless, a reading today that significantly diverges from consensus could awaken both hawks and doves. Ultimately, the devil is in the details, and the market will need to digest the components within minutes of publication, which is precisely what the Fed will focus on ahead of the upcoming decision.

The threshold for keeping rates unchanged is around 0.23% MoM for core PCE. Above this level, annual PCE dynamics could rise from 3.3% to 3.4%. Bloomberg Economics estimates the reading to come in between 0.25–0.30%, which is above the threshold. A separate factor is the BEA's methodological revision on September 30 (covering portfolio management services, software, and legal services retroactively to 2021), which will lower the annual base by about 0.2 percentage points, technically "erasing" this acceleration.

Fed Chair Kevin Warsh has his own metric, which he mentioned at Jackson Hole: the share of 199 PCE components rising faster than 3%. At the time of his speech, it was 54% on a 12-month basis and 49% on a 6-month annualized basis. If this second figure drops after today's report, the scales will tip toward keeping rates unchanged.

How Will Gold Respond?

Gold is correcting its August breakout. Following the peak at 4692, we have seen three lower supply reactions and a pullback to exactly the 50% Fibonacci retracement of the entire wave from 4000 to 4692. Currently, gold prices have fallen below the red 25 SMA, which had acted as support throughout the August impulse. This shifts the market structure from bullish to corrective. Higher up, we still have the 200 SMA at 4547. As long as price remains below it, the medium-term outlook stays neutral.

The green ascending trendline drawn from the late-July low was also broken. Price is currently defending just above the 100 SMA (4334). It's worth noting that gold is forming a potential Head and Shoulders (H&S) pattern with the neckline around $4,310. The target range for this pattern in the event of a breakdown could be near key support at $4,000.

Scenarios

• The key level is 4311, which serves as the neckline of the Head and Shoulders pattern. If core inflation comes in hot—at 0.3% monthly or higher—gold should immediately test 4311. Breaking below this level with a daily close under it activates the pattern, opening the path first to 4265 (where the 61.8% retracement coincides with the 50 SMA), then to 4150, and ultimately targeting the 4000 zone.
• A reading in line with Bloomberg's forecast—0.24% monthly and 2.4% YoY—will likely keep the market range-bound between 4311 and 4445 without a clear advantage for either side.
• A softer surprise below expectations—at 0.2% or lower—should push price back above the 4428 to 4445 zone. However, true confirmation of a bounce will only come after a close above 4470, with the next target being the 200 SMA at 4547.