Market update: gold prices at risk as FOMC bets firm up, US retail sales may trigger a crash

Gold may crash, with prices vulnerable below the 1,700 level after US CPI; rising market bets for a 100-bps FOMC rate hike are weighing on bullion and US retail sales due Thursday may provide the catalyst for a move lower.

Gold prices moved below the 1,700 mark during New York trading on Wednesday, exposing the yellow metal to a potentially violent drop. US inflation data sent Federal Reserve rate hike bets soaring, which supported short-term Treasury yields and the US dollar. The US retail sales report for August, due at 12:30 GMT on Thursday, and the University of Michigan consumer sentiment report for September, due Friday, will round out the week.

Those events may prove key for bullion prices, as they will likely sway FOMC market pricing. Fed funds futures reflect a one in four chance for a 100-basis point rate hike. Gold’s appeal as an asset will fall if those odds increase. The Fed hopes to achieve a soft landing, but its focus is to tame rising prices. A strong underlying economy, however, would help cushion the impacts of higher rates. That would allow the FOMC more flexibility.

That said, a stronger-than-expected retail sales report would likely bode poorly for gold prices. Analysts expect the headline figure to show a 0.1% decrease from July, but that is due to falling gasoline prices. The number to focus on is a measure that excludes gasoline and autos. The Bloomberg consensus forecast calls for a 0.5% increase from July. On Friday, the preliminary Michigan consumer sentiment index is expected to rise to 60.0 from 58.2 in August. The survey also includes inflation expectations, with estimates for the 1-year and 5- to 10-year measures tracking at 4.6% and 2.9%, respectively.

Gold is in a tough spot even if those economic prints miss estimates, as a 75-bps Fed hike is the base case scenario after the CPI. That will keep Treasury yields supported, leaving little room for higher prices. The path of least resistance is skewed lower. XAU will likely fall as the chances for a 100-bps hike increase, with a bearish catalyst likely being triggered once Fed funds futures hit a 50% chance for the super-sized rate hike.

This information has been prepared by DailyFX, the partner site of IG offering leading forex news and analysis. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.