The inflation data most favored by the Federal Reserve is coming! Is gold aiming for the 2800 mark tonight?

Although the cumulative effect of inflation has had a significant impact on the U.S. economy, the situation is gradually improving from a relative perspective. The inflation rate is currently approaching the Federal Reserve's 2% target, a trend that may be reflected when the U.S. Department of Commerce releases its inflation data on Thursday.

At 8:30 PM Beijing time on Thursday, the U.S. will announce the September PCE price index, with forecasts indicating that the overall inflation rate will continue to decline, partly due to falling gasoline prices.

The market expects that the September PCE price index will rise by 0.2% month-on-month and 2.1% year-on-year, while the core PCE price index is expected to increase from the previous value of 0.1% to 0.3% month-on-month, with the year-on-year growth rate slightly slowing to 2.6%, the lowest level since February 2021.

Russell Price, Chief Economist at American Express Financial, stated, “Overall, the trend is downward, but the Federal Reserve still has a long way to go to achieve its target.”

The PCE price index is the Federal Reserve's preferred measure of price changes, and Price expects the overall PCE inflation rate for September to be 2.1%, with the core PCE inflation rate at 2.7%, which is generally in line with market consensus.

Is Inflation Still Sticky?

Most of the components of the PCE report come from the CPI report released earlier this month. The September CPI report showed mixed inflation pressures, with slight increases in housing, auto insurance, healthcare, and airfare prices. However, the report indicated a decline in energy prices, including gasoline prices. The PCE report may depict another mixed picture, although the weights of each category differ in each index.

The market expects that this PCE report may show that categories such as healthcare and financial services will still exhibit some degree of stickiness. Overall, this is expected to leave room for the Federal Reserve to continue cutting interest rates.

Price attributes the difference between the overall PCE and core PCE expectations to the combined effects of falling energy prices and rising healthcare costs. He explained, “The rebound in healthcare costs in September may be reflected in a slight uptick in the core inflation rate.”

What Will Be the Federal Reserve's Next Move?

In September, the Federal Reserve cut interest rates for the first time since the outbreak of the pandemic. Now, investors are closely monitoring inflation and the labor market for clues about the Federal Reserve's next actions. Concerns about an overly cool labor market have eased, but analysts say the Federal Reserve will pay more attention to this aspect of its mandate as inflation pressures have eased.

“We are now in a bit of a tricky position,” said Matt Rowe, Head of Portfolio Management and Cross-Asset Strategy at Nomura Asset Management, as the Federal Reserve and the market analyze what kind of interest rate policy will help balance achieving inflation targets and maintaining a healthy labor market as price pressures ease. He said, “The Federal Reserve is most concerned about the labor market.” Despite this, many analysts do not believe that Thursday's release will change the Federal Reserve's long-term path.

According to the CME Group's FedWatch Tool, the bond market expects a greater than 95% chance of a 25 basis point rate cut in November. This would lower the target range for the federal funds rate to 4.50%-4.75%.

"While core PCE will be stronger than in recent months, we believe this is enough for the Fed to implement a 25 basis point rate cut in November," Bank of America analysts wrote in a report to clients earlier this month. They expect the core PCE inflation rate for September to grow by 0.23%-0.26%.

Price expects the Fed to keep rates unchanged in November and resume rate cuts in December. He stated, a rate cut once per quarter by the Fed is a reasonable expectation.

Additionally, the U.S. will release its non-farm payroll data report on Friday, with the market expecting October's non-farm payrolls to plummet from the previous value of 254,000 to 115,000, while the unemployment rate is expected to remain at 4.1%.

Is Going Long on Gold a Wise Choice?

Amid political tensions in the U.S. and turmoil in the Middle East, gold continues to attract safe-haven funds and is approaching the $2,800 mark. The further rise in U.S. Treasury yields has revived demand for the dollar, which has somewhat limited the price of precious metals. Traders are now looking forward to the release of the U.S. PCE price index.

FXStreet analysts point out that despite the recently released quarterly inflation data, the PCE data released on Thursday may have only a minor impact.

The analyst added that technically, despite being overbought, the daily chart for gold remains bullish, with prices continuing to trade above all its moving averages, and the 20-day simple moving average (SMA) currently around $2,691.70. The 100 and 200-day moving averages are accelerating higher, well below the shorter moving averages, reflecting sustained buying interest. Finally, technical indicators have entered overbought territory, losing some upward momentum, but are far from showing exhaustion of upward momentum. Before any relevant downward correction occurs, gold has the potential to refresh higher historical highs.

On the 4-hour chart, gold shows sustained strong upward momentum. Technical indicators have regained their gains in the overbought area after a mild corrective decline, confirming that buyers continue to seize opportunities during pullbacks. Ahead of the U.S. elections, gold may break through $2,800 and continue to rise.

City Index senior analyst Matt Simpson also stated:

"Whether gold rises or falls, traders are eager to buy gold, which keeps the pullback in gold relatively small and the consolidation quite tense. If the PCE inflation rate's month-on-month growth reaches 0.2% or lower, its trend seems likely to continue upward."