Gold Outlook: Strong Payrolls Cap the Bounce — U.S. CPI to Decide the Next Move

Gold had a choppy week. Early on, markets were still digesting the fallout from Warsh's hawkish remarks, keeping prices under pressure. On Thursday, dovish comments from Fed Governor Waller led markets to pare back some September rate-hike bets, lifting gold. But Friday's much-stronger-than-expected jobs report quickly wiped out those gains.

Heading into this week, beyond geopolitical developments, the market's focus shifts to August's PPI and CPI data. These are the last major economic releases before the September FOMC meeting, and the results could meaningfully shape the Fed's rate path — and gold's trajectory along with it.

On the XAUUSD daily chart, gold reversed course twice last week, trading mostly between $4,300 and $4,500. Bears currently have the upper hand, with price testing $4,400 to the downside.

In the near term, $4,400 is the key level for gauging whether bulls or bears are in control. A confirmed close below this level would put the next support around $4,300.

Conversely, if price can hold above $4,400, bulls could retest $4,500 and eventually push toward August's high of $4,697. That said, any bounce needs to be treated with caution ahead of the CPI release, given the risk of profit-taking.

Gold's mid-week bounce toward $4,500 was rejected, and the biggest catalyst behind that was a significant improvement in the jobs data.

The data showed the U.S. added 162,000 jobs in August, well above the 55,000 consensus and the strongest reading in five months. The unemployment rate held steady at 4.1%, while the prior two months were revised up by a combined 55,000. The message to the Fed was clear: even with a rate hike, the labor market has enough cushion to absorb it without serious damage.

Markets are now pricing roughly a 60% probability of a September rate hike. For gold, the payrolls data has fundamentally undercut the "Warsh's stance lacks data support" narrative that markets had been counting on for a reversal. Labor market resilience has instead reinforced the Fed's hawkish lean and given the dollar a marginal boost. As a dollar-denominated, non-yielding asset, gold naturally comes under pressure in that environment.

That said, the August labor market wasn't quite as robust as the headline suggests. Nearly 80% of the new jobs came from retirees returning to the workforce and part-time positions, with core full-time job growth barely moving the needle. Meanwhile, goods-producing sectors, information technology, and finance — the parts of the economy that actually reflect organic growth — continued to shrink.

In other words, the structural weakness in the U.S. labor market hasn't gone away. Combined with Trump renewing pressure on the Fed to cut rates, expectations around the future policy path have grown less settled. That's an important reason gold, after briefly dipping below $4,300, was able to quickly claw back some of its losses.

Over the weekend, direct fighting between the U.S. and Iran flared up again in the Strait of Hormuz. U.S. forces struck three Iranian oil tankers, and Iran retaliated with ballistic missiles against a U.S. aircraft carrier and destroyer. On Sunday, Iran announced it would designate an exclusion zone in the Strait of Hormuz in the coming days. Markets are increasingly concerned the Middle East conflict is settling into a longer-term standoff.

Oil prices are likely to stay supported in the period ahead, which means the "rising oil → higher inflation concerns → stronger rate-hike bets → pressure on gold" logic could reassert itself. Worth noting: agricultural prices are also climbing globally on the back of El Niño effects, meaning the breadth of inflationary pressure may be wider than markets are currently pricing in.

Central bank gold buying, concerns about U.S. fiscal discipline, and hedging demand tied to midterm election uncertainty continue to provide structural buying support for gold. But if inflation risks keep surprising to the upside, what looks like short-term noise today could gradually turn into a longer-term headwind.

Taken together, gold had a mixed week. Labor market resilience, combined with rising inflation concerns from geopolitical conflict and extreme weather, weighed on prices — while structural cracks in the jobs data and central bank buying continued to provide some longer-term support.

Thursday's U.S. PPI and Friday's CPI will be the two most important events to watch this week.

Markets expect core PPI to rise to 4.6% year-on-year (up from 4.2% previously), with the monthly figure also ticking modestly higher. Meanwhile, headline CPI is expected to rise 0.4% month-on-month, a marked increase from the prior 0.1%, while core CPI is expected to rise 0.2%, unchanged from the previous reading.

Fed Governor Waller has already laid out his threshold: a core CPI print above 0.3% month-on-month would put a hike back on the table, while a reading below 0.2% would lean him toward standing pat.

If both releases confirm that inflation is picking up, markets could push rate-hike pricing even higher, keeping gold under pressure. If inflation data continues to show signs of cooling, gold could get some breathing room.

Also worth watching this week is the ECB's policy meeting. Markets have almost fully priced in a 25 basis point hike. Should that hike materialize — and align with tightening moves from the Fed, the RBA, and the Bank of Japan — it could further sap gold's bullish momentum.

Finally, with the U.S. Labor Day holiday in effect, CME-listed precious metals and U.S. crude oil futures contracts will close early, at 4:30 a.m. AEST Tuesday. With liquidity set to thin out, traders should think carefully before holding large positions into Monday evening.