Gold recovers after core CPI scare as October hike bets stay capped

Gold came close to new monthly lows yesterday after the core CPI report came in above consensus, but the metal eventually erased the entire decline. The initial move struck me as an overreaction, since a rise to 0.3% in the core reading would still not have been enough to make the market fully price an October rate hike.

After that knee-jerk drop, the implied probability of a hike at the upcoming meeting settled at about 30%, up just 9 percentage points from the 21% reading before the CPI release.

Today's calendar features US PPI, although I do not expect it to shift rate-hike expectations materially. Unless producer prices surprise to the downside, the response could mirror yesterday's CPI reaction, with a downward surprise potentially fuelling a relief rally in gold.

Geopolitics look much the same as before. The Saudi Arabia–Houthi conflict is ongoing, and US–Iran talks remain deadlocked. Oil keeps climbing against the backdrop of the Middle East crisis.

Looking forward, events in the Middle East and the Fed's policy outlook remain the main points of focus. A US–Iran breakthrough could send gold sharply higher as traders pull back on rate-hike bets. A Fed that is slow in responding to rising inflation could be another supportive factor for gold, especially if inflation expectations climb faster than nominal yields and real yields fall.

On the downside, a more hawkish Fed or an escalation in the US–Iran standoff could add further pressure on the precious metal.

Technical analysis — daily timeframe

The gold CFD contract slipped again yesterday after core CPI beat expectations, but the loss was fully recovered. A downward trendline remains in place and may act as resistance. Sellers are likely to lean on that trendline, placing their risk above it, as they position for a move toward the 3,885 level. Buyers, for their part, will wait for a break higher before entering in anticipation of a rally to 4,700, with 4,500 serving as the initial target.

Technical analysis — 4 hour timeframe

Prices spiked lower on the CPI release and then bounced back. From a risk management point of view, sellers have a better risk-reward setup near the trendline and the 4,228 resistance if they want to keep pushing toward new lows. Buyers need to break above both the trendline and that resistance to clear the path for fresh highs and a move toward 4,400 next.

Technical analysis — 1 hour timeframe

A minor descending trendline may provide resistance. Sellers will likely use it, with risk defined above the line, to keep pressing for new lows. Buyers will look for a breakout that extends the pullback toward the trendline and the 4,228 resistance.

Upcoming catalysts

Today brings US PPI, US Retail Sales and the latest US Jobless Claims figures. Fed Chair Warsh is also due to speak very late in the day, in a fireside chat with IMF Managing Director Georgieva. Warsh is against forward guidance, so there may not be much of substance, but the event is still worth watching.