Gold extends three-week rally, focus on inflation data and rate cut odds

Gold has been on a solid bullish run for the past three weeks as traders price in a higher chance of rate cuts from the Federal Reserve. The initial momentum was triggered by softer-than-expected jobs data in July, which saw downward revisions in the payrolls data from previous months. Hopes for an outsized 50bp September cut briefly surged, then faded after an upside surprise in July producer price index (PPI), suggesting consumer prices could see continued upside pressure in the near future. The odds of a larger cut are now back, albeit marginally. This time, a softer-than-expected reading in the August jobs data is the culprit.

Inflation data could re-shape expectations

The key focus this week is going to be the inflation data for August. Wednesday will see the PPI data followed by the consumer price index (CPI) on Thursday. Both of these could cause a reaction in markets. Softer prints would reinforce the view that the Federal Reserve is going to cut aggressively over the coming months, which would benefit gold both in the short and long-term. However, a hotter reading on wither of the two prints could introduce some nervousness into the markets, possibly ramping up volatility. This is because markets have the view that the US economy will avoid a nasty recession if the Fed cuts rates significantly over the coming months, given that risk appetite remains strong. If fears of stagflation start to emerge, then the central bank will have a tough job of balancing the health of the labour market and price stability. 

The shifting outlook has dampened the outlook of the US economy, weighed on the dollar and supported dollar-denominated commodities. Gold has been a clear outperformer. The precious metal is up almost 8% since breaking above a symmetrical triangle pattern at the end of August. However, as a non-yielding asset, it has one key weakness: it doesn’t generate any income. Therefore, its outlook hinges on the belief that it will continue to appreciate as a way of offering value to portfolios.

Technical outlook remains bullish

For now, the path of least resistance remains to the upside, and the outlook is bullish. Lower rates will continue to benefit gold, as will a weaker dollar. Uncertainty, especially around the Fed’s independence, is also a key tailwind for the precious metal. If diversification away from the dollar as the dominant reserve asset inches forward, that could underpin a more durable upside extension.

Gold (XAU/USD) daily chart

Past performance is not a reliable indicator of future results.