- Gold gains ground despite overall US dollar strength, traders focus on upcoming US Consumer Price Index (CPI) release.
- The CME FedWatch tool shows a 73% chance of a 25 bps Fed rate cut, changing from previous speculation of a 50 bps move.
- U.S. Treasury yields are holding steady as traders await further clues on inflation trends and the Fed’s rate path.
Gold gained ground on Monday as traders prepared for the release of the August inflation report in the United States (US) and looked for signs that the Federal Reserve (Fed) would cut rates by 50 or 25 basis points. At the time of writing, XAU/USD is trading at $2,502, up 0.23%.
Market sentiment improved overnight for North American traders, as evidenced by solid gains in U.S. stocks. U.S. Treasury yields retreated somewhat along the short and long ends of the curve, with the 10-year yield unchanged at 3.706% compared to last Friday’s close.
Bullion traders shrugged off the overall strength of the US Dollar as the Greenback posted gains of more than 0.30%, according to the US Dollar Index (DXY), which measures the performance of the Dollar against six currencies.
Meanwhile, traders reduced the odds of a 50bps rate cut following last Friday’s Non-Farm Payrolls (NFP) figures, which despite missing expectations showed a decline in the unemployment rate from 4.3% to 4.2%. Now, attention turns to the release of the Consumer Price Index (CPI), which is expected to decline further towards the Fed’s 2% target.
The CME FedWatch tool shows the odds of a 25 bps Fed rate cut have risen to 73%, while the odds of a 50 bps cut stand at 27%.
Sources cited by Reuters said, “The market seems to be reconciling itself to the fact that the Fed is probably more likely to make the smaller 25 basis point cut, and that has been my position all along.”
Earlier, the US economic calendar featured the New York Fed’s inflation expectations report, which showed prices remain anchored at the 3% threshold, unchanged from the previous survey but slightly above the Fed’s target.
Daily Market Wrap: Gold prices rise as traders await US CPI
- US CPI is expected to decline from 2.9% to 2.6% year-on-year in August, while core CPI is projected to remain unchanged at 3.2%.
- Last week’s NFP report revealed that the economy added over 142,000 employees to the labor force, but missed the consensus of 160,000. However, the decline in the unemployment rate gave the dollar some relief.
- On Friday, Fed officials were dovish. New York Fed President John Williams said cutting rates would help keep the labor market balanced, while Governor Christopher Waller said “the time has come” to ease policy.
- Chicago Fed President Austan Goolsbee was dovish, saying policymakers have an “overwhelming” consensus to lower borrowing costs.
- It is worth noting that Fed officials entered their blackout period ahead of the Federal Open Market Committee (FOMC) monetary policy meeting.
- Data from the Chicago Board of Trade (CBOT) indicate the Fed is expected to cut at least 104.5 basis points (bps) this year, based on the December 2024 federal funds rate futures contract.
- China’s central bank halts gold purchases for fourth month in August
Technical Outlook: Gold Price Buyers Reclaim $2,500
Gold prices resumed their uptrend above $2,500, although buyers seem to be failing to gather momentum below $2,510.
Momentum remains bullish, but the yellow metal could consolidate in the near term before resuming its uptrend or turning lower. The Relative Strength Index (RSI) is almost flat, suggesting that neither buyers nor sellers are in charge.
If XAU/USD rises above the year-to-date high at $2,531, that could sponsor a rally to challenge $2,550. If overcome, the next stop would be the psychological mark of $2,600.
On the other hand, if gold prices fall below $2,500, the next support would be the August 22 low at $2,470. If broken, the next demand zone would be the confluence of the May 20 high, which turned into support, and the 50-day simple moving average (SMA) between $2,450 and $2,440.
Gold FAQs
Gold has played a pivotal role in human history as it has been widely used as a store of value and a medium of exchange. Today, apart from its luster and use for jewelry, the precious metal is considered a safe haven asset, meaning it is considered a good investment in turbulent times. Gold is also considered a hedge against inflation and currency depreciation as it is not dependent on any particular issuer or government.
Central banks are the largest holders of gold. In their aim to support their currencies in turbulent times, central banks tend to diversify their reserves and buy gold to improve the perception of the strength of the economy and the currency. High gold reserves can be a source of confidence in a country’s solvency. Central banks added 1,136 tonnes of gold worth about $70 billion to their reserves in 2022, according to data from the World Gold Council. This is the largest annual purchase on record. Central banks in emerging economies such as China, India and Turkey are rapidly increasing their gold reserves.
Gold has an inverse correlation with the US Dollar and US Treasury bonds, which are the main reserve and safe haven assets. When the Dollar depreciates, the price of Gold tends to rise, allowing investors and central banks to diversify their assets in turbulent times. Gold is also inversely correlated with risk assets. A rally in the stock market tends to weaken the price of Gold, while sell-offs in riskier markets tend to favor the precious metal.
Gold prices can move due to a wide range of factors. Geopolitical instability or fears of a deep recession can cause the price of Gold to rise rapidly due to its status as a safe haven asset. As a non-yielding asset, Gold prices tend to rise when interest rates fall, while rising money prices often weigh down the yellow metal. Still, most of the moves depend on how the US Dollar (USD) performs, as the asset is priced in dollars (XAU/USD). A strong Dollar tends to keep Gold prices in check, while a weaker Dollar is likely to push Gold prices higher.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
