July PCE Outlook: Core PCE is expected to heat up, with gold poised to break through the range!

The July Personal Consumption Expenditures (PCE) inflation report released on Friday may convince investors that the Federal Reserve will cut interest rates for the first time next month, but market experts suggest that the PCE data could trigger a breakout in gold prices. Additionally, don't expect a boost in the US stock market as a result.

Analysts expect that the inflation indicator favored by the Federal Reserve will show that the July PCE data will complicate the timing of the Fed's rate cut next month. Investors are concerned that the latest report may not provide enough clarity for the financial markets to understand the speed and extent of the Fed's rate cut.

According to a survey by The Wall Street Journal of economists, economists expect the year-on-year growth rate of PCE in July to remain unchanged at 2.5%, while the core PCE, which excludes volatile food and energy costs, is expected to slightly increase to 2.7%, higher than the previous month's 2.6%.

Burns McKinney, Managing Director and Portfolio Manager at NFJ Investment Group, said, "The Fed's rate cut in September is already quite certain, and the trend of PCE will not change that. The Fed has clearly stated that they will start a rate cut cycle from September."

Fed Chairman Powell gave the strongest signal to date last week, stating that "the time has come" to adopt an accommodative monetary policy as recent economic data shows inflation firmly returning to the Fed's 2% target.

Does the PCE report support an anti-inflation scenario?

Some investors believe that if the upcoming July inflation data meets expectations, it will be difficult to prove that the Fed has a "sudden new attitude" towards rate cuts. Barbara Rockefeller, President and Chief Economist of Rockefeller Treasury Services, said, "It seems unreasonable to predict multiple rate cuts based on this PCE data, a single rate cut in September can be understood."

Others believe that despite a potential moderate increase in core PCE, the anti-inflation trend will continue. McKinney stated on Tuesday, "Powell has been warning not to focus too much on a single data point, and if you look at the trend, regardless of how this data is released, the anti-inflation trend is already quite certain."

Gregory Daco, Chief Economist at EY, stated that the economic fundamentals point to sustainable anti-inflation, as factors such as increased pricing sensitivity, slowing housing cost inflation, moderate wage growth, and strong productivity growth will continue to push inflation towards the Fed's 2% target, despite the risk of energy price shocks. Daco wrote on Wednesday that his team expects the year-on-year growth rate of core PCE to slow to around 2.5% by the end of 2024.

Investors have differing opinions on the Fed's rate cut path

Another key issue of the financial market is whether the Federal Reserve will cut interest rates by 25 or 50 basis points in September, but analysts say that Friday's PCE report is not very helpful in resolving this confusion.

The market may be too aggressively betting on a significant rate cut this year. According to the CME Group's FedWatch Tool, on Wednesday, federal funds futures traders estimated a 36.5% probability of a 50 basis point rate cut in September, up from over 24% last week. At the same time, the probability of a 25 basis point cut has dropped to 63.5%, down from over 75% a week ago.

Matt Lloyd, Chief Investment Strategist at Advisors Asset Management, stated that the PCE report no longer has as much impact on Fed decisions as it used to. "The labor market may now be the key to determining whether the next meeting will see a 25 or 50 basis point rate cut." In particular, if the August employment data released on September 6 aligns with the slowdown in hiring in July and the 4.3% unemployment rate, the labor market could be a decisive factor in Fed decisions.

Lloyd mentioned that due to the upcoming Labor Day weekend in the United States, investors may choose a "risk-neutral" stance, so the financial markets may not react much to Friday's PCE data. However, the August employment report next week will receive more attention from the stock market.

Lloyd did not rule out the possibility of increased volatility in the financial markets on Friday, as market trading volume is expected to remain low, which could "distort returns on US Treasuries and stocks." According to Dow Jones market data, trading volumes for US Treasuries and stocks have been very low this week, with Tuesday seeing the lowest volume since August 28, 2023.

On Thursday, the latest economic data boosted investors' confidence in achieving a soft landing for the economy.

Gold Price Technical Analysis

Fxstreet analyst Dhwani Mehta stated that as gold prices continue to consolidate this week, US PCE inflation data could trigger a range breakout.

She mentioned that there seems to be a risk of an upward breakout in gold, as a symmetrical triangle breakout pattern is forming, and the 14-day Relative Strength Index (RSI) is well above 50.

As long as gold prices remain above the triangle near $2470, the bulls can maintain control. The 21-day Simple Moving Average (SMA) is approaching this area, making it a strong support level.

The primary support for gold is at the $2500 level, and if the price breaks below this level, it will test the low of August 23 at $2485. If it breaks below $2485, gold prices may face support near $2470, which was previously a resistance turned support level On the other hand, gold bulls need to break through the historical high of $2532 at the daily closing to challenge the next key resistance level at $2550.

The next resistance could be at the $2600 integer mark, with a potential target price of $2660 ultimately aiming for the triangle pattern