The Fed has been on an uber-hawkish and frontloaded tightening path, having already delivered 225 basis points worth of rate hikes, which stand at 2.25-2.5%, in order to bring sky-high inflation under control. Although it had seemed at some point that the pace could slow in the future, recent rhetoric and this week's CPI report don't leave much room for such an outcome.
The Core Consumer Price Index jumped 6.3% in August (year-over-year) from 5.9% prior, to the highest level since March, crashing hopes for a peak in inflation. At the same time, it bolstered market pricing around the Fed's rate path.
Before Tuesday's report markets were expecting another 75 bps move at next week's meeting, which remains the baseline scenario, but now also see a 24% probability of an even bigger 1% hike - according to CME's FedWatch Tool at the time of writing. 
Furthermore, markets now price in a significantly higher interest rate, of 4.25-4.50% by the end of the year. Fed officials saw the median rate at 3.8% by that time on their last Staff Economic Projections from June, so we will be keenly awaiting to see how the updated ones will be shaped next week.
This aggressive pricing has pushed US bond yields and the US Dollar higher this week, sending EUR/USD back to parity and NZD/USD to the lowest level since May 2020, while the Japanese Yen tries to resist with the help of verbal interventions by Japanese officials.
It also deprives Gold from the ability to benefit from its status as an inflation hedge, as it drops to the lowest levels since April 2020 and the height of the pandemic. It heads towards another losing week and runs its sixth straight losing month, erasing around 20% form the March peak.
XAU/USD now breaches an important technical level in the 1,682-1,677 region, which marks the 38.2% Fibonacci of the 2015 Low/2020 High rally and the neckline of the Double-Top formation (with the 2020 record high and the 2022 high acting as the tops).
Closes below this level would confirm the formation and could open the door to even bigger losses, potentially towards the Monthly EMA200 (at around 1,290).
Of course, such moves would probably need time to play out and the precious metal may get the chance to stage a rebound as the Relative Strength Index moves to oversold territory. In any case, the next leg of the move will be determined by the Fed's upcoming announcement.
Senior Market Specialist
Nikos Tzabouras is a graduate of the Department of International & European Economic Studies at the Athens University of Economics and Business. He has a long time presence at FXCM, as he joined the company in 2011. He has served from multiple positions, but specializes in financial market analysis and commentary.
With his educational background in international relations, he emphasizes not only on Technical Analysis but also in Fundamental Analysis and Geopolitics – which have been having increasing impact on financial markets. He has longtime experience in market analysis and as a host of educational trading courses via online and in-person sessions and conferences.
Retrieved 23 Sep 2023 https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html#