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Headline inflation is expected to rise, and technical selling moves gold lower

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Market participants are waiting for the CPI (Consumer Price Index) report which will be released tomorrow. According to economists polled by the Wall Street Journal, the report will reveal that headline inflation increased by 0.6% last month. If their predictions are correct this would be the largest increase since June 2022. This would take inflation from 3.2% in July to 3.6% last month.

The primary cause of this large increase in inflation is dramatically higher oil prices. Oil has risen almost 25% since the end of July. Also, the cost of housing has increased by approximately 7.7% in the past year, considerably higher than the housing and rent costs before the pandemic.

That being said, the Federal Reserve is expected to leave its benchmark interest rate (fed funds rate) unchanged at next week’s FOMC meeting. According to the CME’s FedWatch tool, the probability that the Fed will not raise rates next week is 93%. The probability that the Federal Reserve will maintain its current rate has been 90% or higher for a month now. The probability indicator for rate hikes by the Fed is predicting that there is a 59.3% probability that the Fed will stay the course in November with a 38.1% probability of a ¼% rate hike.

According to a poll conducted by Reuters News service, “The Federal Reserve will leave its benchmark overnight interest rate unchanged at the end of its Sept. 19-20 policy meeting and probably wait until the April-June period of 2024 or later before cutting it, according to economists in a Reuters poll.”

This is in line with recent statements from Chairman Powell who has been on record since his speech at the Jackson Hole economic symposium to maintain the current elevated interest rates "higher for longer". The chairman and other members of the Federal Reserve have been resolute as they continue to keep the possibility of additional rate hikes on the table if needed to reach its 2% inflation target.

The result of the forecast for tomorrow's CPI report combined with next week’s FOMC meeting was traders actively selling gold futures which traded to a low of $1929.80 in trading this morning. As of 4:40 PM EDT, the most active December contract of gold futures is currently down $11.40 and fixed at $1935.80. Spot gold is also under pressure and currently fixed at $1912.50 according to the KGX (Kitco Gold Index). The KGX revealed that the vast majority of today’s decline is directly attributable to market participants bidding the precious yellow metal lower by $8.30 with a $1.00 decline directly attributable to fractional dollar strength resulting in today’s total decline of $9.30.

Today’s decline in gold is the result of traders factoring in the most recent predictions for tomorrow’s inflation report. We could see extreme volatility tomorrow if the report differs to any large extent from the current forecast.

Wishing you as always good trading,

Gary S. Wagner - Executive Producer