Oil price escalation constitutes one of the most pressing challenges

The primary inflation measure of the Federal Reserve, the Consumer Price Index (CPI), met market projections for August, showing a monthly increase of 0.4 percent and a 3.4 percent rise compared to the same month last year.

The Core CPI, which excludes energy and food prices, experienced a slight uptick of 0.3 percent, marginally surpassing prior forecasts.

Earlier in August, the Producer Price Index (PPI) also recorded a 0.4 percent increase. However, when assessed on a year-over-year basis, the figure escalated from 4.8 percent to 5.4 percent due to surging energy prices.

Following the release of the CPI data, the likelihood of an interest rate hike, which was previously estimated at 68 percent, surged to approximately 85 percent. While the market may show some relief, given that inflation has not escalated significantly, the failure of the inflation index to decline remains a critical concern for Federal Reserve policymakers, particularly in light of rising oil prices exceeding $100 per barrel.

Additionally, the ongoing lack of resolution regarding the geopolitical tensions between the United States and Iran worsens the situation, while food prices continue to remain elevated.

Of particular concern is that the current inflation rate of 3.4 percent significantly exceeds the Fed’s target rate of 2 percent.

The escalation of oil prices poses one of the most pressing challenges, and a rapid return to pre-conflict pricing levels appears unlikely in the near future.

The forthcoming diplomatic discussions between Gulf ministers and Iranian officials may temporarily stabilize oil prices but will not provide a sustainable solution unless a peace agreement is reached.

The proposed talks aim to establish a temporary arrangement to enhance the security of commercial shipping through the Strait of Hormuz.

A breakthrough in negotiations could potentially reduce oil prices by around $10. Otherwise, ongoing price escalation is anticipated.

A key issue continues to be the reliability of oil supply, which is now significantly reduced. Gulf exports have already diminished by one-third, totalling around 8 million barrels per day compared to pre-war levels.

The psychological threshold of $100 per barrel will persist, and much will hinge on the outcomes of diplomatic discussions.

In the currency markets, the focus will shift towards the US Dollar and Japanese Yen as two major central banks convene to decide on interest rates.

The Federal Reserve will meet on September 15–16, followed by the Bank of Japan on September 17–18.

Presently, the market anticipates an 85 percent to 90 percent probability of a 25 basis point rate hike by the Federal Reserve, which is poised to significantly influence the 10-year bond yield, currently serving as a key benchmark.

The upcoming fluctuations in gold and possibly the Yen depend on the Federal Reserve’s decision regarding interest rates.

Two scenarios will emerge. An interest rate hike, which would likely bolster the US dollar relative to other currencies, or a decision to maintain rates, which could weaken the USD while favouring 10-year US bond yields and the Yen. In such a scenario, gold prices would also likely experience a sharp increase.

It is my assessment that the Federal Reserve may delay any rate hike until the following month.

Conversely, the Bank of Japan is expected to proceed with a rate hike. If implemented, this action will support the Japanese Yen.

However, future direction will heavily rely on forthcoming guidance, which will dictate subsequent moves. In the absence of a rate hike by the Bank of Japan, the Yen may weaken significantly.

Meanwhile, the European Central Bank (ECB) recently raised its interest rate for the second time in 2026, and market expectations suggest a potential further increase this year owing to inflationary pressures.

While the ECB’s deposit rate currently stands at 2.50 percent, the interest rate differential remains favourable to the USD, which lies between 3.75 percent and 4 percent.

Much will depend on the forthcoming guidance and press statements from the Federal Reserve Chairman, which could significantly influence currency outcomes. Should the Federal Reserve opt to maintain rates, the Euro is likely to benefit. Conversely, an interest rate hike could exert downward pressure on the Euro.

Based on my analysis, I maintain a moderately bullish outlook for gold in the upcoming week, at least until the Federal Reserve’s announcement.

The subsequent price movements for gold will be largely dictated by the Fed’s decision.

However, taking into consideration the recent CPI data, a stronger tone may be anticipated at the beginning of the new week, unless the level of $4260 is breached. Nevertheless, any potential upward movement may face selling interest around or beyond the $4425 threshold.

WEEKLY OUTLOOK - Sept 14-18

#GOLD @ $4344- Gold is anticipated to hold the support of $4260-70 for a potential recovery. A rise above $4425 could lead it toward $4465. If it exceeds that threshold, it may attract sellers. Conversely, a breach of the support level could drive it down to $4210 or below.

#EURO @ 1.1599- Euro is anticipated to maintain support at the 1.1520 level, potentially leading to some upward movement. If it breaks through 1.1698, it could rally towards 1.1750. However, dropping below the support levels poses a risk of falling to 1.1460.

#GBP @ 1.3527- I anticipate that the Pound Sterling will maintain a level at 1.3440, as my outlook is somewhat positive, targeting either 1.3620 or 1.3665. Alternatively, it could settle at 1.3450.

#JPY @ 153.52- We might observe increased volatility in the $/JPY pair. If it can hold a level of 155.98, we could see a shift toward 150.20. A break below that level would suggest a move to 148.50.

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