Gold prices edged lower on Tuesday, while the dollar regained some ground as investors looked ahead to the release of significant U.S. macroeconomic indicators and Federal Reserve's interest-rate decision due on September 20, 2023. Spot gold slipped 0.2 percent to $1,919.30 per ounce, while U.S. gold futures fell 0.3 percent to $1,942.15.
The U.S. consumer price inflation report due on Wednesday is highly anticipated by investors. An unexpected increase in inflation could potentially dampen market sentiment and increase the appeal of the U.S. dollar. The Federal Reserve is expected to halt its recent series of rate hikes next week, but the outlook for November remains uncertain, with the FedWatch Tool indicating a 42.6 percent chance of another quarter point rate hike.
Traders are also keeping an eye on the European Central Bank's (ECB) latest policy decision due Thursday. The ECB is expected to raise all three policy rates by 25 basis points due to a weaker growth outlook and lack of clear evidence of a peak in core inflation.
The market has been cautious ahead of the August U.S. CPI report, with price action tracking sideways in compressed ranges. The monthly CPI data, along with employment numbers, are critical factors in determining Fed policy and therefore the path for the U.S. dollar.
The dollar has seen a significant rise over the past eight weeks, driven by a continuous stream of strong macroeconomic data indicative of a U.S. economy yet to be significantly impacted by a rapidly raised Fed funds target rate north of 5%.
Inflation readings exceeding their respective consensus forecasts of 3.6% and 4.3% could lead to expectations for additional late-cycle hikes and continued outperformance of the dollar, while U.S. equities and other risk-sensitive assets track lower.
Meanwhile, wage inflation in the U.K. has been uncomfortably high in recent months, leading the Bank of England to maintain its tightening bias. Odds for a 15th consecutive hike from the BoE at next week's monetary policy meeting are firm, with market pricing assigning an approximately 80% probability that the bank rate will be raised 25bps to 5.50%.
Despite this, there are encouraging signs for the BoE. Wage inflation has been primarily driven by public sector wage spikes while the increase in private sector pay was marginal. The BoE places more emphasis on private sector metrics. Furthermore, looser labour market conditions were signaled via a falling vacancy to unemployment ratio and employment declining the most since September 2020.
Looking ahead, the focus remains on U.S. inflation data. Monthly U.K. GDP and eurozone industrial production will also attract attention but are unlikely to influence short-term direction. If U.S. CPI exceeds expectations, NZD/USD could potentially fall back below 59 U.S. cents to re-test the year-to-date low.
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