Gold prices up around 1% as traders pare Fed rate hike bets after in-line July CPI

Gold prices were about 1% higher on Wednesday, after an in-line July consumer inflation report prompted traders to reduce Federal Reserve interest rate hike expectations. Gains were capped by continued uncertainty over a Middle East peace deal to reopen the Strait of Hormuz. 

At 15:12 ET (19:12 GMT), spot gold climbed 1.1% to $4,416.15/oz, while gold futures advanced 0.8% to $4,476.35/oz.

Annual headline and core consumer inflation decelerates 

On Wednesday, precious metal market participants were squarely focused on the July consumer price index (CPI) report for further cues on monetary policy outlook. The data came after a weaker-than-expected July jobs report on Friday led to a rapid recalibration in Fed rate hike odds for September.

As per the U.S. Bureau of Labor Statistics, headline CPI ticked up 0.1% M/M in July, after falling 0.4% in June, while cooling on a Y/Y basis to 3.4% from 3.5%. Core CPI, which strips out food and energy, increased 0.2% M/M, after a flat reading in June, while also decelerating on a Y/Y basis to 2.5% from 2.6%. All four measures matched expectations.

CPI will be followed by July producer price index (PPI) figures on Thursday. While both indicators are widely followed, the Fed prefers to track the personal consumption expenditures (PCE) price index to gauge inflation. Components from CPI and PPI feed into the PCE.

For the Federal Open Market Committee (FOMC), the in-line readings likely give it more breathing room to hold interest rates steady instead of hiking, especially after the weak jobs report on Friday. Interest rate odds reflected such a move, with the CME FedWatch tool showing chances of the FOMC holding steady in September ticking up to 60% after the CPI report from 54%. Higher rate environments tend to weigh on non-yielding assets such as bullion.

"Today’s cool core number, paired with a headline figure meaningfully above it, signals to the Federal Reserve that cost forces would be near the organization’s 2% target if it weren’t for geopolitical tensions supporting higher fuel prices," José Torres, senior economist at Interactive Brokers, said.

"Meanwhile, declining nonfarm payrolls, amid evidence of labor market risks, are warning the central bank to focus on both employment and inflation to keep the expansion alive and well. The recent data justify a shift from Chair Kevin Warsh’s unwavering attention to quelling price pressures towards a broader mindset characterized by an increasingly evenhanded approach," he added.

Oil benchmark briefly touches $90 as Hormuz uncertainty prevails

Turning away from the economic calendar and to the Middle East, oil prices fluctuated on Wednesday amid more mixed messaging on the Strait of Hormuz. Brent crude futures, the global benchmark, briefly touched $90 a barrel.

There appeared to be little progress towards a peace deal to reopen the critical strait, with both the U.S. and Iran continuing to claim control over the vital waterway.

"The U.S.A. has total control over the Strait of Hormuz," Trump said on his Truth Social service.

Earlier, Iran’s state media on Tuesday said the country had reiterated its demands that the U.S. cease hostilities across all fronts and release frozen assets before the strait could be reopened, citing comments made by security council chief Mohsen Rezaei to the Chinese ambassador to Tehran.

"The Strait of Hormuz won’t open until the U.S. changes behavior and accepts Iran’s conditions. Any Iran-Oman transit agreement is a separate matter from the closure of the Strait," Rezaei said, according to state media.

While Kpler data showed a modest rise in confirmed vessel crossings through the strait on Tuesday, the overall mood remained one of caution, compounded by fresh attacks. Houthi rebels reported an attack on commercial shipping in the Bab el-Mandeb Strait that killed four cargo-ship crew members and two Yemeni rescuers, while the U.S. disabled a Panama-flagged vessel near the Gulf of Oman.