Gold price rally stalls as dollar strengthens ahead of key inflation report

The recent surge in gold prices has hit a temporary hurdle as investors turn their attention to the upcoming release of a key inflation indicator. The Personal Consumption Expenditures (PCE) Index, scheduled to be released on Friday, August 30 at 8:30 a.m. EDT, is highly anticipated by market participants seeking insight into inflation trends in the world's largest economy.

The PCE index, particularly its core component, which excludes volatile food and energy costs, serves as the Federal Reserve's preferred indicator for measuring inflation. According to FactSet consensus estimates, economists are forecasting a 0.2% increase in the PCE price index for July, slightly more than June's 0.08% increase. Core PCE is expected to maintain its growth rate of 0.18% in June. On an annual basis, forecasts suggest that the PCE price index will rise to 2.6% in July from 2.5% in June, while core PCE is expected to reach 2.7%, up from 2.6% in June.

If these projections are accurate, they would support the Federal Reserve's intention to move from its current tight monetary policy to a more accommodative stance. This shift would involve a normalization of interest rates in the coming years, a move that has gained momentum following recent comments by Federal Reserve Chairman Jerome Powell.

Powell's statement that “the time has come for a policy adjustment” has cemented expectations of an imminent rate cut. While he did not provide specifics on the timing or magnitude, the market has already priced in a rate cut for the Fed's next meeting. CME's FedWatch tool shows a 100% probability of a September rate cut, with the probability of a 25 basis point cut at 63.5% and the probability of a more aggressive 50 basis point cut at 36.5%.

As traders await Friday's inflation report, recent momentum in gold prices has faded. For the first time since last Friday, gold prices have fallen from record levels. At 5:30 p.m. EDT, December gold futures were trading at $2,539, down $21, or 0.82%, on the day. The contract opened at $2,559.80 and hit an intraday high of $2,564.30.

The main factor contributing to the weakness in gold prices is the stronger US dollar. The dollar index is up 0.50% at 101.06, but is still well below its recent high of 106.153 on June 26. Over the past three months, the dollar has lost more than 5% of its value, which had previously supported the rise in gold prices.

This pause in the gold price uptrend highlights the complex relationship between precious metals, currency markets and monetary policy expectations. As investors digest the upcoming PCE data and await the Federal Reserve's next moves, the interplay of these factors will likely continue to influence gold prices in the near term.

The market's reaction to Friday's inflation report will be crucial in determining whether gold can resume its upward trend or whether the recent decline signals a more significant correction. Regardless of the outcome, the precious metal remains a key focus for investors navigating the complex landscape of global economic indicators and central bank policies.

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