Tomorrow is a big day for traders and the Fed as it is when we will see a new reading for the US CPI data. Remember, inflation has been a massive headache for the Fed and kept them in the corner. To fight inflation, the Fed adopted one of the most aggressive hawkish monetary policy, and they have increased the interest rate at the fastest pace this year.
The Fed has aggressively raised interest rates to combat inflation at its highest level in more than 40 years. The central bank raised benchmark rates four times in 2022, for a total rise of 2.25 percentage points. Market pricing now hints at a third straight 0.75 percentage point increase in September.
For the past few months, traders and investors have been hoping that they will get to see a peak in inflation readings, and tomorrow their prayers may come true as it is widely anticipated that they may see a slow down in the inflation number.
If we see a decrease in the inflation reading, it will be primarily due to two crucial factors. Firstly, oil prices have started to move away from their record-high levels, and secondly, the aggressive monetary policy has weakened consumer spending.
The data will be coming out at 12:30 GMT tomorrorw. According to respondents in the New York Federal Reserve’s monthly Survey of Consumer Expectations, inflation will increase by 6.2 per cent over the next year and 3.2 per cent over the next three years. Even if those figures are still relatively high by historical standards, they represent a significant decline from the corresponding results of 6.8 per cent and 3.6 per cent from the poll conducted in June.
If the inflation data cooperates, it may provide policymakers with a cause to ease up, if not in September, then later in the year. The Fed’s long-term inflation objective is 2 per cent, so the survey’s forecast values are still much higher than the level at which the Fed is comfortable.
Fed Governor Michelle Bowman stated over the weekend that she doesn’t anticipate inflation to decline anytime soon and believes rates need to continue to rise. Similarly, San Francisco Fed President Mary Daly stated that the increases are far from done.
Gold traders are likely to remain on their toes as they want to know how the new reading of the CPI will influence the Fed’s monetary policy, which moves the price of gold as it is closely tied with the dollar index. During the early hours of trading, we see traders trading gold with a lot of caution, and many are interested in booking some profit after yesterday’s rally.
If the inflation number comes out better than expected, i.e., it shows that inflation may have peaked, it will take much burden off from the Fed, and that means we are likely to hear a less hawkish tone from the Fed, which could push the dollar index lower and favour the gold prices. If we do not see evidence of inflation slowing or any change in the Fed’s monetary policy stance following this data, it could push the dollar index higher, which may bring more pessimism among gold traders and adversely influence the shining metal.
Regarding important price levels, it is all about the battle between the shining metal’s price and its 50-day SMA. As long as the price continues to trade higher above this average, we could see higher highs. On the other hand, if prices begin to break down and move lower from their 50-day SMA, we could see more pain for gold traders.
The sentiment seems to be shifting among crypto traders. This is mainly due to one fundamental reason: institutions are still very much interested in Bitcoin and do not want to waste the current opportunity to bag bitcoin while it is cheap. The evidence of this comes in the news where BlackRock decided to use Coinbase to offer cryptos to its client. This news is as big as it can get, and it shows that despite all the blow-ups in the crypto yield market, the smart money knows that crypto is an asset class in which they should be involved as the risk-to-reward ratio is very motivating.
Tomorrow’s CPI number will also be an interesting one for the Bitcoin price as, just like the gold price, the strength in the dollar index has been hurting the bitcoin’s price. Any weakness in the dollar index could support the price of bitcoin and vice versa.