In an unusual move, both the dollar and gold have risen ahead of two major risk events this week. The trend shows that markets remain uncertain about what to expect from the upcoming data. The releases could determine whether the Fed delivers its expected rate hike next month.
Any deviation from expectations could trigger significant volatility across asset pairs. The market may struggle to find a clear direction.
Over the last month, gold has weakened while the dollar has gained. This follows the normal pattern, as the two assets often move inversely. Monetary policy usually drives this relationship. Higher rates support the dollar and weigh on gold. Lower rates tend to have the opposite effect.
What the Data Means for the Fed
Markets have increased their expectations for another Fed hike at its next meeting. Futures now imply more than a 90% chance of a hike at the end of October.
Normally, this would support the dollar and pressure gold. The yellow metal does not pay interest. As a result, higher yields on US Treasuries can make them more attractive to investors.
However, gold has not followed this pattern over the last few days. This suggests that markets remain nervous about the upcoming data and are hedging their bets.
Gold also acts as a major safe-haven asset and a hedge against higher inflation. Therefore, markets could be preparing for a stronger-than-expected reading on Wednesday. A weaker inflation figure could instead increase downside risks for the dollar.
Alternatively, a significant downward revision to previous NFP figures could weaken the case for an October rate hike.
What the Market Is Looking For
On Wednesday, markets expect the Fed’s preferred inflation measure to rise slightly. August Core PCE is projected to accelerate to 0.3% from 0.2% month-on-month. The annual figure is expected to rise to 3.4% from 3.3%.
If inflation excluding energy and food continues to rise, the case for a Fed pause becomes harder to defend. However, a decline in inflation could weaken the odds of an October hike. This effect could become stronger if previous jobs data also sees a downward revision.
Next comes Friday’s US Non-Farm Payrolls (NFP) release for September. Economists expect hiring to slow significantly. Total payrolls are expected to reach 90K, down from 162K in August.
However, last month’s figure came in well above expectations. A revision could therefore offset the impact of a beat or miss in the latest report.
The unemployment rate is expected to remain unchanged at 4.1%.
How the Market Could React
NFP could generate the most volatility because the report remains highly unpredictable. It also contains several moving parts.
The dollar and gold are likely to react more to the overall direction of the data than to one specific figure. The key question is whether the US labour market remains resilient while inflation stays high.
If both conditions persist, the Fed could proceed with a rate hike. This scenario would likely support the dollar and pressure gold.
On the other hand, cooler inflation and weaker jobs data would make a Fed pause more likely. That could weaken the dollar and support gold.
A mixed result could create the most volatility. Higher inflation could have a stronger impact than weaker jobs data, depending on the scale of the surprise.
