Gold jumps, dollar rebounds as Fed's September policy leans toward a 25 basis point hike

On Wednesday, local time, the United States released its highly anticipated inflation report, showing that the year-on-year growth rate of the Consumer Price Index (CPI) in July reached its lowest level in nearly three years. Data shows that the US CPI rose 0.2% month-on-month in July, an increase of 0.3 percentage points compared to June, and increased by 2.9% year-on-year, a new low since March 2021. Excluding the more volatile food and energy components, core CPI increased by 3.2%, up 0.2% month-on-month, in line with expectations.

Despite the cooling inflation data, the market's pricing for a shift in the Fed's September policy has remained largely unchanged, with the balance tilting towards a traditional 25-basis-point rate cut. Affected by this, the US dollar index rebounded 0.4% from its intraday low, and COMEX gold on the New York Mercantile Exchange plunged by over 1%. Next, how Fed Chairman Powell comments on recent data next week will be a key focus for the market.

**CPI Report Shows Limited Highlights, Market Reaction Muted**

The US Bureau of Labor Statistics said on Wednesday that while the July CPI data showed a slight month-on-month increase, the year-on-year growth rate fell significantly, reaching a new low in nearly three years. This data indicates that inflationary pressure in the US is gradually easing, providing more room for the Fed's future policy adjustments.

However, the market's reaction to the CPI report was relatively muted. Boris Schlossberg, macro strategist at BK asset management, said in an interview with Yicai Global that after the recession scare in early August, the market is paying more attention to growth indicators. Therefore, for price indicators, meeting or slightly exceeding expectations will not significantly affect the pricing of rate cuts, but unexpected increases will cause market concerns, and today's situation belongs to the former.

The renewed increase in the monthly rate of rent has brought uncertainty to the price outlook. David Doyle, head of economics at Macquarie Canada, pointed out, "This report is not as favorable to disinflation as the June report, but overall, the report further reinforces the fact that the trend remains unchanged. This provides the Fed with more evidence that the rebound in underlying inflation that occurred in the first quarter was temporary and has reversed course."

**Uncertainty Remains Over Rate Cut Magnitude, Market Awaits More Data**

Before the Fed's decision next month, two important price data points will be presented to the Federal Open Market Committee (FOMC): the Fed's preferred measure of July Personal Consumption Expenditures (PCE) and the August CPI report. The Cleveland Fed's Inflation Nowcasting model shows that core inflation will continue to face upward pressure, and the pace towards the 2% medium-term target may slow.

Lauren Henderson, an economist at Stifel Financial, believes that the latest CPI report has some concerns and that more data is needed to confirm. If upward risks are seen in the future, it is not ruled out that the Fed may not cut interest rates until the fourth quarter.

Paul Ashworth, chief economist at Capital Economics, also said: "The July CPI report is arguably slightly encouraging, but it also doesn't show that price pressures are falling sharply enough to justify a larger 50-basis-point rate cut."

**How Powell Will Pave the Way for Rate Cuts, Market Awaits Guidance**

According to the schedule, the Jackson Hole Global Central Banking Symposium will be held from Thursday to Saturday next week. Historically, the Fed has used this occasion to announce significant changes in policy frameworks or signal stances.

Wall Street generally predicts that after signaling at the beginning of the month, Fed Chairman Powell will prepare for a rate cut in September in his speech. Krishna Guha, vice chairman of Evercore ISI, said in a report to clients that Powell will set the tone for the upcoming monetary easing policy by leaning towards a "proactive" rather than "passive" rate cut.

The July non-farm payroll report raised concerns about a recession, and the next report will be released on September 6. Guha said: "This is a Fed that prioritizes labor data, not inflation data, and the upcoming labor data will determine the magnitude of the Fed's rate cut."

According to pricing from the CME Group's FedWatch, investors have largely abandoned bets on a 50-basis-point rate cut in September, with the probability of a significant rate cut currently around 40%. Former Kansas City Fed President George also said in an interview with the media on Wednesday that the traditional 25-basis-point model is the most appropriate choice at this stage.

Scott Helfstein, head of investment strategy at Global X, expects that with the CPI falling below 3% for the first time in three years, Powell may declare victory at Jackson Hole and try to convince the market that there will be a 25-basis-point rate cut in September.

Guha's report also predicted the impact of the latest non-farm payroll data. If the August employment report is better than last month, the Fed will cut interest rates by 25 basis points in each of the remaining three meetings this year; but if the August employment data continues this new trend of weakness, the Fed may cut interest rates by 50 basis points in September and November; if the data shows that the labor market is collapsing, the Fed will cut 200-250 basis points before December.

In summary, although the July CPI data reached a new low in nearly three years, there is still considerable uncertainty in the market about the magnitude of the Fed's September rate cut. Powell's speech at Jackson Hole next week will be a key focus for the market, and investors are looking forward to him providing more guidance on the future direction of policy.