Navigating the Gold Market: How the upcoming US CPI and PPI data could influence FOMC decisions

Gold traders are keeping a close eye on this weeks US CPI and PPI figures as the data points will undoubtedly influence the FOMC meeting on 20 September and 1 November.

US annual inflation growth peaked at 9.1% in July 2022 to reach and reached a low of 3% in July 2023. Yet the August reading showed an increase to 3.2%, and economist poll expect consumer prices to come in even hotter at 3.6% on Wednesday, 13 September, at 12:30 GMT.

The projected rise in inflation is likely due to an uptick in crude oil prices. While cooler wage growth is expected to have the opposite effect.

Why does this matter for gold traders？

The inflation report matters for gold traders as it could force the Federal Reserve to deliver another rate hike. Its possible to see this rate hike as early as 20 September or get pushed back to the meeting scheduled on 1 November.

Today, an investor could park their money with the central bank and get an annal return of 5.25%, making it costly to hold gold.

Correlation studies using data for the last 90 days show that gold prices are strongly negatively correlated to the US 10-year government bond yield, with a coefficient of -0.76. In a simplified world, a 1% gain in interest rates will lead to a 0.76% drop in gold prices.

The correlation to the S&P500 (SPX500) is much weaker at -0.44, while the correlation to the VIX is almost non-existent at 0.15.

What is the outlook for the FOMC meeting？

Today, the CME Fed Funds Futures predict that the rate will remain unchanged in the 525-550 bps range at its September meeting, with a probability of 93%. If they leave rates untouched next week, it should have a limited impact on gold prices on the day.

However, if inflation is hotter than expected this week, the Federal Reserve could increase interest rates as early as November 1. Todays Fed Funds Futures pricing suggests another 25-bps rate hike by at least 44.6%. Hence, if inflation is too hot, it could increase interest rates and lower gold prices.

Trapped in a bullish wedge pattern

Gold prices are in an uptrend since October last year, shortly after US inflation peaked. While since May 2023, the price has been stuck in a downward point wedge. The pattern is bullish and suggest that gold price could trade higher. However, for this to happen, the price needs to leave the range and trade above the September 2023 high of $1953. If this were to happen, the wedge pattern suggests the price might reach the 5 May high of $2052. Until this happens, the price will remain in a downtrend, and we could revisit the wedge pattern low around $1886.

It also looks like the likely target given that the US economy is doing better than expected, and if the CPI report this Wednesday indeed comes it higher than expected, the pattern low, will likely be the target of bearish traders.

What about the PPI？

Producer prices are also due this week and tend to lead to consumer prices by months. The annual return in PPI dropped from 11.2% in March 2022 to -0.7% in June 2023, to rise to 0.8% in July. This report has, traditionally, received little attention given that other factors are in the determination of US CPI. Yet, a much stronger or weaker reading than expected on Thursday could impact gold price as it would either force the Fed to increase interest rates or have them stay put.