On Friday (September 16), the U.S. Department of Commerce released August retail sales data, showing a 0.6% month-over-month increase, significantly exceeding market expectations of a 0.2% increase and matching July's upwardly revised 0.6% growth, demonstrating unexpectedly resilient consumption. Core retail sales (excluding autos, gasoline, building materials, and food services) rose 0.7%, accelerating from July's 0.5% growth. However, the data raises concerns: some of the increase stems from higher import prices driven by tariff talk, rather than pure consumer expansion.

After the data was released, the US dollar index rose sharply by 8 points to 97.1309 in the short term, while gold fell by $3.5 to $3687.88 per ounce, reflecting the subtle impact of consumer resilience on expectations of interest rate cuts.

Real-time market: US dollar squeeze, gold under pressure and pullback

The market reacted swiftly to the data release, with the US dollar and gold trading in sharp focus. The US dollar index surged from 97.05 to a daily high of 97.13, erasing early weakness caused by the unexpected 2.9% inflation rate. The 10-year US Treasury yield rebounded 2.3 basis points to 4.057%, mirroring the 1.6 basis point rise in the German 10-year bond yield to 2.7113%, demonstrating the global bond market's immediate response to the resilience of the US consumer. Gold, on the other hand, came under significant pressure, retreating from a high of $3,691 to $3,687.88, with trading volume surging 30% as long stop-loss orders triggered a chain reaction. Compared with history, in similar scenarios (such as after a 0.5% increase in retail sales in July 2024), the US dollar often rebounds for two weeks, and gold gives up 2%-3% of its gains; under the current high-level fluctuations, the low of $3,687 has tested the short-term support, and the US dollar-gold relationship with a negative correlation coefficient of 0.75 has reappeared. Every 1 point of US dollar increase will push gold down by about $1-2.



Institutional analysis quickly captured the market shift. One prominent bank analyst stated that while 0.6% retail sales growth was strong, combined with last week's largest CPI increase in seven months, tariff-driven price increases contributed at least 0.3 percentage points, leaving actual consumption momentum likely at only 0.3%, insufficient to offset the drag from a weak labor market (e.g., a 4.3% unemployment rate). Another institution noted that the impressive 0.7% core retail sales performance will weaken market bets on a 50 basis point rate cut. If the Fed's dot plot shows interest rates only falling below 3% by the end of 2026, the dollar could face a further squeeze to 98. Prior to the data release, institutions focused on dovish expectations supported by labor data (job vacancies were lower than the number of unemployed), suggesting that if retail sales fell below 0.2%, gold would head towards $3,675. After the data exceeded expectations, institutions turned cautious, warning of the risk of tightening financial conditions.

Retail investors were equally active, with sentiment shifting from optimism to divergence. Some believe the resilience of retail data was overestimated. Excluding price factors, actual consumption growth was limited, with after-tax wage growth for low-income households hitting its lowest level since 2016. This suggests that slowing consumption will force the Federal Reserve to accelerate easing, and that a pullback to $3,687 in gold presents a buying opportunity. Some believe the dollar's 8-point rise overreacted to the retail data, ignoring the structural risks of weak employment. Gold will return to $3,700 after the Fed confirms a rate cut. Others believe that the better-than-expected core retail sales figures have weakened expectations of aggressive rate cuts, and that a rebounding dollar will continue to squeeze gold bulls, with support at $3,650 to watch in the short term. Earlier in the morning, many investors bet on weak data pushing gold prices to $3,675. However, after the better-than-expected figures, focus shifted to position adjustments amidst a strong dollar.

Rate Cut Expectations and Market Sentiment: From Dovish Optimism to Cautious Balance

The stronger-than-expected retail sales data directly impacted expectations of a Federal Reserve rate cut. Prior to the release, swap markets were pricing in a 92% probability of a 25 basis point rate cut on Wednesday, while the Bank of Canada's probability of a rate cut rose to 93% over the same period. However, consumer resilience has led traders to question the need for an "insurance" rate cut. A prominent analysis indicates that household spending fell to a near 4.5-year low in August compared to the same period last year (according to the New York Fed), with low-income groups and Generation X bearing the brunt of the labor market weakness. After-tax wage growth has slowed to its lowest level since 2016, which will gradually erode core consumer spending and force the Fed to maintain its accommodative stance. However, price increases triggered by tariff talk have already pushed up the CPI. After pausing easing in January, the Fed faces a trade-off between inflation and employment before resuming rate cuts. The dollar's short-term rebound reflects this trade-off: the index broke through 97.13, consolidating gains made earlier in the session due to inflation concerns.

The shift in market sentiment is vividly reflected. Before the data, both institutional and retail investors expected weak labor force conditions (unemployment rate at 4.3%) to drive dovish policies, leading to near-record gold long positions. After the data, institutions warned that if the dot plot fails to align with the market curve, tightening financial conditions will push the dollar higher, potentially testing support at $3,650. Retail sentiment shifted from "cooling consumption is good for gold" to "a safe-haven rotation amidst the dollar squeeze," with some traders beginning to manage their leverage. Historically, after Q2 2024 saw 0.4% retail sales growth, the dollar rebounded for two weeks, pushing gold back from $2,850 to $2,780. Given the current high base, a similar trend could put pressure on gold in the short term, but central bank gold purchases (estimated at 710 tons/quarter in 2025) and the risk-off premium associated with the Russia-Ukraine situation are expected to limit downside.

Future Trend Outlook: US dollar dominates in the short term, gold awaits catalyst

In the short term, the US dollar is likely to continue its data-driven strength, while gold will depend on the Fed meeting for direction. If the dot plot confirms the market's expected dovish path (interest rates slightly below 3% by the end of 2026), the US dollar index could encounter resistance at 97.5 and retreat, sending gold to $3,700. Conversely, if it indicates gradual rate cuts, the US dollar could continue to test 98, with gold testing support at $3,650 in the short term. In the long term, a consumption slowdown is already evident, with institutions projecting full-year spending growth to fall to 1.5%. Coupled with sluggish wage growth for low-income groups, the Fed's easing path is unlikely to deviate. As a geopolitical hedge and preferred diversification option for the US dollar, gold is expected to fluctuate at a high level, benefiting from central bank gold purchases (expected to exceed 1,000 tons by 2025). If the Bank of Canada maintains a 93% probability of a rate cut, this will further weaken the US dollar's relative strength and help gold test $3,750.

The core of the current market lies in the dynamic game between expectations and reality. A short-term boost in retail sales data cannot mask the structural weakness of the labor market. While the 8-point rise in the US dollar has squeezed gold bulls, safe-haven demand and expectations of easing will keep gold prices on the lower side. Watch the Fed's dot plot and Powell's remarks at Wednesday's meeting, while also being wary of tariff rhetoric and the Russia-Ukraine situation that could disrupt risk aversion.