Cooler Inflation Data Lifts Gold Prices Amid Fed Rate Hike Odds

Gold prices stabilized around $4,155 an ounce at the start of October after a volatile September. The metal's value had dropped by 6% in September, its largest monthly loss since June, following the Federal Reserve's rate hike and signal for further action. However, a cooler-than-expected US inflation reading, with the personal consumption expenditure index excluding food and energy rising only 0.2% in August, has given markets some relief.

This softer inflation signal led to traders slashing bets that the Fed will raise interest rates again this month. The probability of a rate increase at the October meeting is now around 34%, down sharply from almost 70% earlier in the week. Despite this, the lingering threat of further tightening and elevated bond yields leaves gold exposed to additional downside.

Ewa Manthey, a commodity strategist at ING Bank, notes that the metal received some support from the softer inflation print, which took pressure off expectations for another hike. However, global bond yields have risen during the month as worries over mounting government debt and widening fiscal deficits pushed up term premiums, increasing the opportunity cost of holding bullion.