Another sleepless night! The Fed's September rate cut depends on tonight, will gold aim for a new high?

Ahead of the September meeting where the Fed is expected to decide on a rate cut, the Federal Reserve will receive the final two inflation data points this week.

On Wednesday, the U.S. Bureau of Labor Statistics will release the August CPI data. The following day, the bureau will release the August PPI data, an indicator of wholesale prices.

The market is now largely convinced that the Fed will cut rates in September, with the only question being the magnitude of the rate cut. Last Friday's non-farm payroll report did not provide a clear answer to this question, so both the market and the Fed will carefully analyze these two reports.

The overall CPI inflation is expected to show a year-on-year growth rate slowing to 2.6%, below July's 2.9%. The month-on-month growth rate is expected to remain stable at 0.2%, consistent with July's increase.

In terms of core CPI, which excludes volatile costs such as food and gasoline, August core CPI is expected to rise by 3.2% year-on-year, matching July's increase. The month-on-month growth rate of core CPI is expected to remain unchanged from the previous month, with an expected increase of 0.2%.

Despite inflation slowing down, it remains above the Fed's 2% target. Recent economic data, including a weak labor market, suggest that the Fed is almost certain to cut rates before the next policy meeting on September 18.

"It's time to adjust policy now," said Fed Chair Powell at the Jackson Hole central bank symposium last month.

The current question is how much policy adjustment the Fed will make in terms of rate cuts. Wednesday's inflation data update may help clarify this decision.

Citigroup economist Veronica Clark stated in a report:

"From the perspective of influencing Fed policy, inflation data has taken a back seat, with employment data taking the lead. However, due to diverging views on the appropriate magnitude of the first rate cut on September 18 among the market and Fed officials themselves, August CPI data may still be a key factor in the upcoming decision."

"We expect the August CPI report to continue to bring positive news on the inflation front," wrote Bank of America economists Stephen Juneau and Jeseo Park in a preview before the report's release. "This data should strengthen the case for the Fed's rate cut in September."

Inflation Data to "Stabilize"

Core inflation has persistently remained high due to rising housing and core services costs (such as insurance and healthcare). Bank of America expects these trends to largely remain unchanged.

"We expect a divergence in core goods and services prices," economists said. "This is largely due to the stickiness of rental inflation, which unexpectedly rose last month. Looking ahead, given supply growth and rental pricing data, rental inflation should normalize to pre-pandemic levels in the medium term, but monthly data may continue to fluctuate." Goldman Sachs' team led by Chief Economist Hazous expects the US August housing inflation to slow down. "Looking ahead, we expect the core CPI inflation rate for the remaining time of this year to be around 0.2% per month," Goldman Sachs stated. "We anticipate further anti-inflation processes in 2024 as the automobile, housing rental, and labor markets rebalance, although we expect the inflation surge in healthcare and car insurance to be offset. We project the core year-on-year CPI inflation rate to be 2.9% in December 2024, and the core PCE inflation rate to be 2.6%."

Rate cut is a "done deal", the question is how much? Market "debates" continue!

With inflation continuing to slow down, the debate over whether the Fed will cut rates by 25 basis points or 50 basis points in September has become increasingly intense in recent months.

"Another benign CPI report may make enough Fed officials more 'convinced' that inflation is returning sustainably to 2%, thereby supporting a 50 basis point rate cut," wrote the economic team led by Jay Bryson of Wells Fargo in a report to clients last Friday. "On the other hand, if inflation data is hotter than expected, the market may reach a consensus on a 25 basis point rate cut by the Fed in September."

However, it is worth noting that the Fed may have shifted its focus from controlling inflation to concerns about the labor market. Since April, hiring activity has slowed significantly, with the monthly average increase in non-farm employment dropping from 255,000 in the previous five months to 135,000, and job vacancies have also decreased.

Dean Baker, co-founder of the Center for Economic and Policy Research, wrote, "August CPI data should show further progress towards the Fed's 2% inflation target. Unless there are some unusual surprises, this report should not contain anything that would prevent the Fed from cutting rates."

With the Fed's increasing focus on the labor market, expectations for the Fed to start cutting rates have also risen. The benchmark federal funds rate is currently at a level of 5.25% to 5.50%.

The market expects the likelihood of a rate cut by the Fed before the end of its September meeting to be close to 100%. However, according to the Chicago Mercantile Exchange's FedWatch tool, after traders estimated a 60% chance of a 50 basis point rate cut last week, the probabilities of a 50 basis point cut and a 25 basis point cut are now 70% and 30% respectively.

"Besides the initial rate cut, we believe that economic activity and labor market data will be more decisive in determining the speed and depth of the rate cut cycle than inflation data," said Juneau and Park of Bank of America. "In other words, the Fed's reaction function is beginning to pay more attention to its other target - full employment." Currently, some economists are engaged in a "verbal battle" over the magnitude of the Fed's rate cut in September. Some believe that a mere 25 basis point rate cut by the Fed may be a mistake, while others think that a "big gun" like a 50 basis point rate cut could scare the market.

Samuel Tombs, Chief US Economist at Pantheon Macroeconomics, pointed out that considering the overall decline in hiring activity and the significant downward revisions to employment numbers in previous months, the summer economic slowdown may appear more severe in the coming months, with "significant room for further decline" in hiring activity.

In a report on Monday, Tombs stated, "Therefore, we are disappointed - but not surprised - by the FOMC's decision to cut rates by 25 basis points before the blackout period following the employment report and ahead of the policy meeting this month. However, by the November policy meeting, when we will have two more recent employment reports in hand, the case for a rapid rate cut will become overwhelming."

However, Hazous and his colleagues believe that deploying such a "big gun" could damage market sentiment.

Aditya Bhave, US Economist at Bank of America, stated in a client report, "Based on the information we have, such an aggressive rate cut is unnecessary. Moreover, if the Fed were to start with a 50 basis point rate cut, either through Fed officials' speeches or the dot plot, less dovish forward guidance could lose credibility."

Bullish Outlook for Gold Remains Firm

CityIndex analyst Fawad Razaqzada pointed out that the bullish outlook for gold remains firm, with the fundamental support for the US dollar no longer stable, and cooling inflation solidifying the Fed's rate cut prospects. Razaqzada expects gold to continue rising in the coming weeks. However, close attention should be paid to August CPI data, as an unexpected rise could disrupt the bullish outlook. If the downward trend in inflation persists, gold is poised to break out of its range and reach new historical highs, as a decline in US dollar yields will drive funds towards other better-performing safe-haven assets.

FXStreet analysts noted that from a short-term technical perspective, there seems to be no change in gold prices. On Tuesday, gold prices closed above the 21-day Simple Moving Average (SMA) for the second consecutive day, currently at $2503, with buyers maintaining hope. The 14-day Relative Strength Index (RSI) is rising again, well above the 50 level, demonstrating bullish potential.

The current target for gold buyers is to continue breaking above the historical high of $2532, and if this level is breached, the next resistance to watch is the psychological level of $2550. However, if gold prices encounter resistance near the $2530 region again, a pullback will follow, but gold prices need to close below the 21-day moving average of $2503 to completely negate the recent bullish outlook. If gold falls below $2503, it may test the previous week's low of $2472. If it breaks below this level again, close attention should be paid to $2462, which is the support-resistance swap of the previous symmetrical triangle pattern