Gold on pace for monthly drop as U.S. inflation data looms

Gold prices edged up on Wednesday, but were on pace to notch a monthly drop, as investors geared up for the release of key U.S. inflation data closely watched by the Federal Reserve. 

At 09:35 ET (13:35 GMT), spot gold had risen 0.3% to $4,193.62 an ounce, while gold futures had gained 1.1% to $4,223.47 an ounce. Over the last month, spot gold has fallen by more than 6%.

One of the main questions of trading day on Wednesday may revolve around the trajectory for inflation, and how the Federal Reserve will calibrate monetary policy over the coming months to address price gains. These factors are critical for gold, as higher rates can dent the attractiveness of non-yielding assets like gold.

"[Wednesday] sees the latest update on US Core PCE, the Fed’s preferred inflation measure, which has the potential to shake things up a bit," said David Morrison, Senior Market Analyst at Trade Nation, in a note.

The Fed raised rates by a quarter of a percentage point earlier this month, as part of a bid to quell mounting inflationary pressures. Whether or not more hikes are needed to put a lid on prices remains a debate, with New York Fed President John Williams saying this week that there may not be "urgency" to immediately raise rates again in October.

However, all but two of the 18 officials on the Federal Open Market Committee’s latest collection of rate forecasts called for at least one more rate increase this year.

Into this conversation will step the personal consumption expenditures price index, a gauge of inflation that is often preferred by Fed policymakers. The core measure for August, stripping out food and fuel, is seen accelerating slightly to 0.3% from 0.2% month-on-month, while the overall reading is tipped to increase to 0.4% from 0.2%.

Year-on-year, PCE is projected to stand at 3.3% and 3.7% on a core and overall basis, respectively. This would match July’s pace, but remain well above the Fed’s 2% target level.

Elsewhere, Qatar is mediating between Washington and Tehran, with discussions focused on an agreement that could include the reopening of the Strait of Hormuz, which could brighten the outlook for global oil supply flows. Yet the prospect for a breakthrough is dim: President Donald Trump has rejected reports that Washington offered Tehran sanctions relief, while Iran has continued to push for conditions linked to unblocking the strait.

Although signs have emerged of improving supplies out of the Middle East, oil prices are elevated, placing upward pressure on inflation and fueling worries over a cycle of central bank policy tightening.