2300 or 2400? Gold is waiting for tonight's CPI!

On Thursday, spot gold continued its optimistic trend for the third consecutive day, with traders awaiting the release of the U.S. CPI data at 20:30 to confirm whether the Fed can cut interest rates in September.

Fed Chairman Powell's testimony to the Senate on Tuesday briefly interrupted the gold price's recovery momentum, but the bulls regained control shortly after. Powell stated that the labor market has cooled significantly, supply and demand have basically rebalanced, and inflation is no longer the sole risk. Analysts believe he is hinting at a possible rate cut in September, leading to a renewed decline in the dollar and U.S. bond yields.

The enhanced dovish expectations of the Fed also boosted Wall Street's risk appetite, bringing additional downward pressure on the safe-haven currency, the dollar, as gold once again attempted to rise towards $2400. During the Asian session on Thursday, gold maintained its strength and rose above $2380 per ounce, while the dollar continued to weaken.

Market expectations are that U.S. June CPI is expected to rise by 3.1% year-on-year, slowing from the 3.3% increase in May; while core CPI inflation is likely to remain stable at 3.4% year-on-year. Overall CPI is expected to rise by 0.1% month-on-month, while core CPI is expected to rise by 0.2% month-on-month.

If the CPI data performs weaker than expected, it may prompt the Fed to start cutting rates in September, while increasing the possibility of another rate cut in December. In this scenario, gold prices may soar and retest historical highs, as both the dollar and U.S. bond yields are expected to decline.

Marex analyst Edward Meir stated that any unexpected downside in CPI could weaken the dollar and push gold prices to $2400. He said,

"I believe gold has entered a new paradigm, in a higher trading range. We will not see the old lows again, and if there are geopolitical shocks, we may see new historical highs this year."

Conversely, if inflation data exceeds expectations, it may hinder the Fed from cutting rates as early as September, and may cause gold prices to fall back towards the $2300 level. Powell has reiterated the Fed's cautious stance, stating that first-quarter inflation data did not strengthen confidence in the inflation outlook, posing challenges for non-yield assets like gold. Powell emphasized that without clear evidence that inflation is steadily moving towards the Fed's 2% target, a rate cut is premature.

However, the Fed Chair also mentioned that it is not necessary for inflation to be below 2% to start cutting rates, he just needs more positive data. According to CME's FedWatch tool, the market currently expects a 74% probability of a Fed rate cut in September.

Furthermore, analysts at Morgan Stanley pointed out that as emerging market central banks continue to buy gold and the clarification of the U.S. rate cut prospects benefits gold, gold may continue to rise in the short term. With the support of increased holdings by European and Asian listed funds, gold ETF funds saw inflows for the second consecutive month in June, which is also expected to continue to support gold prices