- Gold is rising despite the general strength of the US dollar, as traders focus on the upcoming release of the US Consumer Price Index (CPI).
- The CME FedWatch tool indicates a 73% probability of a 25 bps rate cut by the Fed, a change from previous speculation of a 50 bps cut.
- Treasury yields are holding steady as traders await further clues on inflation trends and interest rate actions from the Federal Reserve.
Gold rose on Monday as traders prepared for the release of the U.S. August inflation report and looked for signs that the Federal Reserve would cut interest rates by 50 or 25 basis points. At the time of writing, XAU/USD was trading at $2,502, up 0.23%.
The market mood improved during the overnight trading session for North American traders, as shown by the solid gains in U.S. stocks. Both short-term and long-term U.S. Treasury yields declined slightly, with the 10-year Treasury yield remaining unchanged from last Friday's close at 3.706%.
Bullion traders ignored the broader strength of the US dollar as it rose more than 0.30% according to the US Dollar Index (DXY), which gauges the greenback's movement against six currencies.
Meanwhile, traders have downgraded the chances of a 50bps rate cut after last Friday's Non-Farm Payrolls (NFP) came in below target but the unemployment rate fell to 4.2% from 4.3%. Attention is now turning to the release of the Consumer Price Index (CPI), which is expected to decline further towards the Fed's 2% target.
According to the CME FedWatch tool, the probability of a 25 bps Fed cut has risen to 73%, while the probability of a 50 bps cut is 27%.
“The market seems to be accepting that the Fed is likely to do a small rate cut, maybe 25 basis points, which has always been my view,” the source quoted by Reuters said.
Earlier on the US economic agenda was the New York Fed's inflation expectations report, which showed that prices remain pegged at the 3% threshold, unchanged from the previous survey but slightly above the Fed's target.
Daily Digest Market Trends: Gold prices rise as traders focus on US CPI
- The U.S. Consumer Price Index (CPI) is expected to fall to 2.6% year-on-year from 2.9% in August, while the core Consumer Price Index (CPI) is forecast to remain at 3.2%.
- Last week's NFP report showed the economy added more than 142,000 employees to the workforce, falling short of the consensus estimate of 160,000, but the falling unemployment rate provided a lifeline for the dollar.
- Fed officials struck a dovish tone last Friday, with New York Fed President John Williams saying lower interest rates would help balance the labor market, while Governor Christopher Waller said “it's time to ease policy.”
- Chicago Fed President Austin Goolsbee struck a dovish tone, saying policymakers had reached a “overwhelming” agreement to lower borrowing costs.
- It is worth noting that Federal Reserve officials entered a blackout period ahead of the Federal Open Market Committee's (FOMC) monetary policy meeting.
- The Fed is expected to cut interest rates by at least 104.5 basis points (bps) this year, based on December 2024 federal funds rate futures contracts, according to data from the Chicago Board of Trade (CBOT).
- China's central bank halted gold purchases for the fourth consecutive month in August.
Technical Outlook: Gold Price Buyers Reclaim $2,500
Gold prices resumed their uptrend above $2,500 but buyers seem to be unable to gain momentum as prices dipped below $2,510.
While the momentum remains bullish, gold may stabilize in the short term and then either resume its uptrend or reverse course. The Relative Strength Index (RSI) is almost flat, suggesting that neither the buyers nor the sellers are in control.
If XAU/USD can climb above the yearly high of $2,531, it could encourage a challenge to $2,550, above which the next stop would be at the psychological $2,600 level.
On the other hand, if gold prices sink below $2,500, the next support is at the Aug. 22 low of $2,470. Below this, the next demand zone is the confluence of support from the May 20 high and the 50-day simple moving average (SMA) between $2,450 and $2,440.
Gold FAQ
Gold has played a vital role throughout 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 in jewellery, the precious metal is widely recognised as a safe haven asset and considered a good investment during volatile times. Gold is also widely seen as a hedge against inflation and currency depreciation, as it is not tied to any particular issuer or government.
Central banks are the largest holders of gold. To support their currencies in times of uncertainty, central banks tend to buy gold to diversify their reserves and to impress upon them the strength of their economies and currencies. Large gold reserves can be a source of confidence in a country's solvency. According to data from the World Gold Council, central banks added 1,136 tonnes of gold worth about $70 billion to their reserves in 2022, the highest annual purchase since records began. Central banks in emerging countries such as China, India and Turkey are rapidly increasing their gold reserves.
Gold is inversely correlated with the US Dollar and US Treasury Bonds, which are the primary reserve and safe haven assets. When the US Dollar falls, gold tends to rise, allowing investors and central banks to diversify their assets during volatile times. Gold is also inversely correlated with risk assets. Rising stock markets tend to drive gold prices down, while sell-offs in risky markets tend to favor the precious metal.
Gold prices fluctuate due to a variety of factors. Geopolitical instability or fears of a deep recession can send gold prices soaring due to gold's status as a safe haven. As a non-yielding asset, gold tends to rise in value the lower interest rates are, but rising cost of funds typically weighs on gold. Still, since the asset is priced in dollars (XAU/USD), most of the movement is determined by the movement of the US Dollar (USD). A strong dollar tends to suppress gold prices, while a weak dollar can boost gold prices.
