Gold prices (XAU/USD) fell by 1.2%, trading around $3,350 during the European session on Monday. This drop comes as investors await the release of the US Consumer Price Index (CPI) data, which is expected to show a rise in inflation for July. Economists forecast that the overall CPI and the core CPI could increase by 2.8% and 3.0% year-over-year, respectively. Higher inflation may affect predictions for interest rate cuts by the Federal Reserve at their meeting in September.

CME Rate Projections

According to the CME FedWatch tool, there is an 88% chance of a 25 basis points rate cut, bringing rates to a range of 4.00% to 4.25%. Gold generally thrives in high-inflation environments, but tight monetary policies from the Fed can hurt non-yielding assets like gold. From a technical standpoint, if gold prices drop below $3,245, they could fall to around $3,200. On the other hand, if prices rise above $3,500, new resistance could emerge at $3,550 and $3,600. Last year, central banks added 1,136 tonnes of gold to their reserves, showcasing gold’s role as a safe-haven asset during uncertain times. This is in contrast to the US dollar and Treasuries, which are also key reserve assets. As gold prices drop back to $3,350, markets are anxiously awaiting US inflation data this week. The upcoming Consumer Price Index (CPI) is crucial, as it could shift expectations regarding interest rates. A higher-than-expected inflation reading could generate significant uncertainty about the Federal Reserve’s future actions. The key challenge lies in balancing inflation and interest rate expectations. While derivative markets suggest an 88% chance of a rate cut in September, a strong CPI report could change those odds. Markets have reacted sharply to inflation data throughout 2023 and 2024, and this situation is no different.

Volatility and Market Implications

In the short term, we can expect increased volatility leading up to the announcement. This scenario makes options strategies especially valuable for traders who anticipate a significant price movement but are uncertain about the direction. A shift above $3,500 or below $3,245 is possible, depending on the CPI results. If July’s inflation data exceeds the expected 3.0% core figure, we should prepare for a bearish reaction in gold. This could mean buying put options to bet on a price decline, with an initial target around the $3,245 support level. Conversely, a surprisingly low inflation figure would reinforce rate cut expectations and likely push gold to challenge resistance at $3,500. In the bigger picture, we must acknowledge strong institutional demand for gold. With central banks adding a record 1,136 tonnes in 2022, recent World Gold Council data from late 2024 and early 2025 indicates that sovereign purchasing remains a significant force. This long-term support implies that any sharp sell-offs triggered by data could present buying opportunities for long-term investors. Create your live VT Markets account and start trading now.

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