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Will the Fed make do with another 0.75% increase? If so, would that soothe the markets? Image Credit: Reuters

The US CPI (Consumer Price Index) figures rose 8.3 per cent, higher than forecasts of 8.1 per cent, sending gold prices down more than $30. Markets were quick to react to the red-hot inflation figures on the back of the Federal Reserve resilience to continue to raise rates.

Ahead of the release of the reading, gold notched the $1,734 level while the euro hovered near key resistance of 1.019. The Sterling also soared to 1.1738 from last week’s huge drop of levels of 1.1404. Markets quickly diverted after the news, with gold touching lows of $1,697, the euro back below parity and the pound tumbling back to 1.14.

The higher-than-expected figure was largely driven by food and housing prices. Electricity and natural gas prices continued to upswing while gasoline prices continued to decline. Setting the tone for next week’s FOMC meeting, markets are now ready to fully price in a hefty hike with probability of another 75 basis points increase. This would give way to a stronger greenback after almost five consecutive days of losses, denting the picture again for the euro, pound and others.

Gold’s out of turn moves

Previous market reactions before a Federal Reserve intervention would have hit markets differently, with, ideally, gold remaining on top as the inflation hedge. But the market rhythm has changed with tightening polices altering the outcome, and the yellow metal could be among the biggest losers.

Major indices on Wall Street also tumbled, notching their biggest daily drop since the pandemic, with the Dow Jones losing more than 1200 points, continuing the chain of post summer selloffs. Although investor never will have settled somewhat now that US inflation rates have dropped from its 9.1 per cent peak, supposedly serving as a boost to market sentiment. Yet, the market remains quite vulnerable to signals of more rate hikes and that will evidently hurt the US and global economy.

Either way, markets will now tune into the next FOMC on September 21, expecting a 75 basis points hike especially after Fed Chairman Powell’s speech of his plan to curb high levels of inflation.