Price of Gold Fundamental Daily Forecast – Red-Hot Producer Inflation Will Solidify 100 bp Rate Hike Chances

After a one-day reprieve from its bear market, gold futures are trading lower on Thursday, hurt by fears the U.S. Federal Reserve could move toward a more aggressive interest rate hike at its July 26-27 monetary policy meeting to fight red-hot inflation.

At 04:50 GMT, August Comex gold futures are trading $1727.90, down $7.60 or -0.44%. On Wednesday, the SPDR Gold Shares ETF (GLD) settled at $161.59, up $0.76 or +0.47%.

Volatile Trade after Consumer Inflation Spikes Higher

Gold posted a volatile two-sided reaction on Wednesday, following the release of the U.S. Consumer Price Index (CPI) report that showed annual inflation jumped 9.1% in June, the sharpest spike in more than four decades. Traders were looking for an 8.8% increase.

The news produced a volatile reaction in most major markets as traders reacted to the headline inflation figures, but there wasn’t very much directional movement. This suggests traders believe the Fed will front-load its rate hikes but not necessarily increase overall rate hike expectations.

According to the FedWatch indicator, the Fed is seen ramping up its battle with sky-high inflation with a supersized 100 basis points rate hike at its upcoming policy meeting on July 26-27.

More Choppy Price Action Ahead

With some experts still pressing for a 75-basis point rate hike at the Fed meeting, and others now pushing for a 100-basis point rate hike, there is enough room to produce a choppy, two-sided trade ahead of the Fed decision.

To look at it another way, based on the inflation data, some traders now see a 75-basis point rate hike as “dovish” when compared to the possibility of a 100-basis point rate hike.

Short-Term Outlook

Traders are now awaiting inflation data on producer prices (PPI), due to be released at 12:30 GMT. Another hot inflation reading is likely to put pressure on the Fed to front-load its rate hike advances with a 100-basis point hike in July.

If the PPI report is neutral then traders are likely to sit on their hands until Friday’s U.S. Retail Sales report. A strong retail sales report will signal to the Fed that the economy is in good enough shape to handle an aggressive, front-loaded rate hike. This will solidify the chances of a 100-basis point rate hike, which would be bearish for gold.

A weak retail sales report will likely convince the Fed that a 75-point rate hike would be sufficient at this time. This is likely to trigger a short-covering rally in gold.