📆 US CPI data for July, due at 1:30 pm BST

Release of the US CPI report for July is a key macro event of the day. Data will be released at 1:30 pm BST and is expected to show headline CPI remaining unchanged compared to June at 3.0% YoY, while core CPI was expected to decelerate from 3.3% YoY in June to 3.2% YoY in July. 

Lower-than-expected PPI inflation reading released yesterday has ignited markets' hopes for a dovish surprise today as well. A lower-than-expected CPI reading today would be another strong indication that Fed has got inflation back under control, clearing one of the hurdles for launched rate cut cycle. This will also mean that US central bank can now focus more on jobs-side of its dual mandate. While US jobs market report continue to show employment gains, US labor market has cooled noticeably.

A sharp drop in PPI inflation in July has boosted hopes for a similar CPI reading today. Source: US BLS, Macrobond, XTB Research

A lower than expected CPI reading today would likely magnify yesterday's dovish post-PPI reaction in the markets. This would mean US dollar weakening while Wall Street indices and gold climb higher. However, as investors increased their positioning for such an outcome after yesterday's PPI reading, a higher-than-expected reading could trigger a sharp hawkish reaction. Nevertheless, as it is becoming increasingly clear that the Fed will launch easing cycle in September, any such hawkish reaction would likely be short-lived.

Money markets are currently pricing in over 100 basis points of Fed easing by the end of 2024. Given that there are 3 FOMC meetings left this year, this means that markets expect that a 50 basis points rate hike would be delivered at least once. Almost 40 basis points of easing are priced in for September meeting, while almost 75 basis points of easing are priced in by November meeting. According to money markets, the most likely outcome for now is a 25 basis point cut in September, followed by a 50 basis point cut in November and another 25 basis point cut in December.

Money markets are currently pricing in over 100 basis points of Fed easing by the end of 2024. Source: Bloomberg Finance LP

A dovish PPI reading released yesterday provided fuel for GOLD to retest the $2,475 per ounce resistance zone. While no break above it occur yet, this area was already tested three times over the past two days. According to technical analysis, the likelihood of the upside breakout increases with each test.

A lower-than-expected CPI reading today would likely lead to another test and possibly a break above the $2,475 per ounce area. A point to note is that intraday all-time highs from July can be found slightly below $2,484 per ounce mark. This would require an around-0.5% jump from current market price, which is not that big of a move given recent volatility on the gold market. Having said that, fresh all-time highs on GOLD cannot be ruled out showed the data surprise to the downside. On the other hand, a higher-than-expected CPI reading could trigger a drop on the GOLD market. However, a higher reading would still be unlikely to noticeably alter market expectations of September rate cut, therefore any such hawkish reaction could be short-lived.

Source: xStation5