50bps rate cut in focus: CPI's impact on gold, indices, and the Fed

Federal Reserve rate cut expectations and inflation

The market currently sees a 51.5% probability that the Federal Reserve will cut rates by 50 basis points at their September 18th meeting, making Wednesday's US consumer price report more significant than usual.

If inflation is higher than expected, it could disrupt these expectations, as just a month ago, on July 12th, the probability of a 50-basis point rate cut was only 6%. This shift is due to recent market turmoil, weak US labour data, and poor ISM manufacturing figures.

Impact of inflation data on EUR/USD

Headline inflation is expected to remain at 3%, with minimal change since last summer. On the other hand, core inflation began the year at 3.9% and has since dropped to 3.3%, which is an encouraging sign for the Federal Reserve. For this week, markets expect both core and headline inflation to increase by 0.2% over the month.

EUR/USD has shown a notable relationship between inflation outcomes and price reactions in 2024. For example, when US inflation was below forecast on July 11th and May 15th, 2024, EUR/USD gained 61.6 pips and 29.8 pips, respectively. Conversely, when inflation exceeded forecasts on April 10th and January 11th, EUR/USD dropped by 84.3 and 50.5 pips, respectively.

Gold price movements and geopolitical tensions

The straightforward relationship can be applied to other markets like gold because trading EUR/USD has not been appealing due to Europe's summer holiday and the lack of solid trends. In contrast, gold prices have surged recently due to rising tensions in the Middle East, forming an ascending triangle pattern from July 17th to August 13th. A break above recent highs at $2,478 could potentially lift prices to $2,586, a 4.32% move, reaching a new all-time high.

Market reactions and potential shifts

Given gold's high correlation with EUR/USD, lower-than-expected inflation could cause traders to trigger the ascending triangle pattern. However, if inflation is more robust than expected, investors might shift their focus to assets like the German DAX, which is up 4.6% from last week's low and facing resistance. Similarly, the S&P 500 shows fragility, with small candles and repeated rejections of higher prices since August 18th, indicating a delicate market. If inflation is more vital than expected, it could shift the focus towards a 25-bps rate cut instead of 50 bps, giving last week's bargain hunters a reason to book profits.

Gold prices, 12-hour chart