Gold slips about 2% as dollar strengthens on increased Fed rate hike bets

Gold prices shed about 2% on Thursday, dragged down by a stronger U.S. dollar after a mixed August producer inflation report boosted Federal Reserve rate hike expectations. An extended weekly surge in oil prices also added to concerns over price pressures.  

At 15:08 ET (19:08 GMT), spot gold lost 1.9% to $4,317.84/oz, while gold futures declined 2.2% to $4,358.67/oz. 

PPI lifts September Fed hike odds 

Precious metal market participants were focused on the August U.S. producer price index (PPI) report.

According to the Bureau of Labor Statistics, headline PPI ticked up 0.4% M/M and 5.4% Y/Y in August, versus consensus estimates of 0.4% and 5.3%, respectively. Moreover, headline figures for July were revised up to an increase of 0.1% M/M and 4.8% Y/Y.

On a core basis, PPI inched up 0.2% M/M and 4.6% Y/Y, compared to consensus estimates of 0.3% and 4.6%, respectively.

The PPI report comes a day ahead of the more closely-watched consumer price index (CPI) data. Components from both feed into the Fed’s preferred inflation gauge, the personal consumption expenditures (PCE) price index.

The producer inflation update also comes just days after a blockbuster August nonfarm payrolls report. Taken together, the indicators point to a highly resilient U.S. labor market and an economy besieged by price pressures. In such a scenario, a central bank typically considers tightening monetary policy.

Those expectations were reflected in Fed interest rate odds. As per the CME FedWatch tool, the probability of a quarter-point rate hike by Federal Open Market Committee (FOMC) on September 16 now stood at 71%, up from about 64% before the PPI data. Higher rate environments tend to weigh on non-yielding assets such as bullion. They also tend to strengthen the dollar, which in turn can make gold more expensive for foreign buyers. 

Wall Street shed and the U.S. dollar index gained, while Treasury yields also moved higher after PPI, as bonds were dumped. The benchmark U.S. 10-year yield was last up 11.8 basis points to 4.955%, while the shorter-end, more rate-sensitive 2-year yield added 12.9 basis points to 4.556%.

"The soft Core PPI print was real, but the market appears to have looked past it. The PCE-sensitive subcomponents (airfares and hospital care) were hot, the headline year-over-year rate accelerated sharply, and upward revisions to July largely neutralized the monthly beat," Chris Osmond, chief investment officer at Fifth Third Wealth Advisors, said.

"Combined with elevated oil prices and a live Fed meeting next week, investors perceived this print as inflationary rather than disinflationary; hence yields moved higher, equities moved lower, and rate-hike odds firmed," he added.

WTI tops $100 for first time since late May

Away from the U.S. economic calendar and interest rates, a spike in global oil prices also remained a central concern for traders. A day after Brent crude futures, the global benchmark, topped $100 for the first time since May 26, U.S. West Texas Intermediate crude futures also surpassed that level for the first time since May 21.

Oil prices are now on track for two straight weeks of massive gains, driven by a resurgence in military action between the U.S. and Iran after a weeks-long stalemate over control of the Strait of Hormuz.

U.S. Central Command on Tuesday said it had destroyed five Iranian crude oil carriers in response to the targeting of a U.S. Navy warship by the Islamic Revolutionary Guard Corps. Meanwhile, Iran’s state media said Tehran responded to the strikes by hitting two American vessels, eight oil tankers, 10 U.S.-backed ships, and a U.S. military base in Jordan.

President Donald Trump on Wednesday told reporters that there will be a "lot more" attacks on Iranian tankers. "I think the war will end immediately after the (midterm) election...They’re desperate to try and affect the election so that we could get a nice, weak group of people in there and leave them alone and let them have their nuclear weapon," the U.S. leader added.

Elsewhere, demand for gold appeared to have firmed, with global gold-backed ETFs attracting $18 billion in August, their second-largest monthly inflow on record, the World Gold Council (WGC) said.

Holdings rose by 121 tonnes to a record 4,189 tonnes, while assets under management climbed 16% to $615 billion. North American funds recorded their third-largest monthly inflow on record, while European-listed funds posted their largest ever monthly inflow, according to the WGC.