The Fed's favorite inflation indicator may report good news again, and the gold market is surging with hidden currents!

The United States will release Personal Consumption Expenditures (PCE) data on Friday at 20:30 Beijing time. This preferred inflation indicator of the Federal Reserve may bring more positive news, prompting officials to continue focusing on the labor market when deciding on the pace of interest rate cuts.

Last week, the Federal Reserve lowered the federal funds rate target by 50 basis points, indicating greater confidence in inflation returning to the target level of 2%. It is widely expected that the PCE data will provide additional support for this stance.

Economists surveyed by FactSet expect the report to show an overall PCE annual rate of 2.3% for August, which would be a further cooling from the 2.5% in July; the overall PCE month-on-month growth rate is expected to be 0.1%, slightly down from 0.2% in July.

Meanwhile, economists predict that the core PCE annual rate, excluding food and energy prices, will slightly rise from 2.6% in July to 2.7%.

However, the most anticipated data point to be released on Friday will be the core PCE month-on-month rate. Economists unanimously believe that the August core PCE month-on-month growth rate will be close to 0.2%, consistent with the price increases in June and July.

However, at least some economists, including Federal Reserve Governor Waller, expect that the core PCE month-on-month rate for last month was only 0.14%, which is rounded to just 0.1%. If this turns out to be correct, according to Waller's estimate last week, the annualized rate of core PCE for the past four months will be below 1.8%, lower than the Fed's 2% target.

Waller said, "It makes me say, 'Wow, inflation is coming down much faster than I thought.' This makes me feel that cutting rates by 50 basis points was the right thing to do."

Waller pointed out that persistent core inflation remains narrowly focused on the housing sector. However, this situation may eventually change. Researchers at the San Francisco Fed estimate that by the end of this year, the annual rate of housing inflation will decline to 2%.

Citigroup economist Veronica Clark wrote, "As the Fed continues to cut rates, the most direct risk of reigniting inflation will appear in the housing and rental markets." But she noted that Fed Chair Powell and Atlanta Fed President Bostic have hinted that they are willing to overlook the still strong housing inflation shown in official data as long as the rise in new rental prices slows down.

With inflation seemingly under control, Fed officials have shifted their focus to the other side of their dual mandate - ensuring maximum employment. In recent months, the unemployment rate has steadily risen, and hiring has cooled significantly.

Data released on Thursday showed that initial jobless claims remained low last week. However, economists, analysts, and Fed officials are eagerly awaiting the September employment report to be released on October 4.

Nevertheless, officials also remain cautious about the direction of inflation. Waller pointed out that officials were surprised by the acceleration of inflation in the first quarter, so they are now remaining vigilant

Major Gold Correction Imminent?

The FedWatch tool from the CME Group shows that despite recent dovish comments from Federal Reserve policymakers and mixed economic data in the United States, the market's expectation for a 50 basis point rate cut in November has decreased, with the current probability at 50%, down from about 62% a day ago.

As the market's bets on a significant rate cut by the Federal Reserve at the next meeting gradually diminish, this seems to have spurred a new round of recovery for the US dollar, curbing the record-breaking rebound in gold prices. However, overnight dovish comments from Federal Reserve Governor Lael Brainard and China's latest stimulus measures continue to limit the downside potential for gold prices.

The upcoming release of the Federal Reserve's most closely watched inflation gauge will determine the next directional move for gold prices and the expectation of a significant rate cut in November by the Federal Reserve.

Higher-than-expected core PCE inflation data could push down expectations for a rate cut in November by the Federal Reserve, initiating a recovery for the US dollar against major currencies. In this scenario, gold prices could sharply correct lower from historical highs. Conversely, a surprise downside in core PCE data could increase the likelihood of another significant rate cut by the Federal Reserve, at the expense of the US dollar, pushing gold prices to new historical highs.

However, reactions to the PCE inflation report may be temporary, as end-of-month and quarter-end fund outflows could come into play and stir the markets. Traders may also take profits on gold before the significant US non-farm payrolls data next week.

Additionally, remarks from Federal Reserve Governor Michelle Bowman at 1:15 am the following day could increase the potential volatility in gold prices.

Fxstreet analysts point out that from a short-term technical perspective, gold prices are still in extremely overbought territory, indicating that a major correction may be imminent. The 14-day Relative Strength Index (RSI) is currently trading above the 76 level, suggesting caution for the bulls. If gold resumes its upward momentum, breaking above the historical high of $2686 is crucial for further upside towards the $2700 level and the psychological barrier of $2750.

On the contrary, any correction in gold prices could test the low of $2623 on September 24, and if broken, the psychological support level of $2600 will come into play. Further down, gold bears may target the low of $2585 on September 20