- As Treasury yields fall and the US dollar weakens, gold prices rise.
- Traders are awaiting US CPI data. The probability of a Fed rate cut is 67% for a 25bps cut and 33% for a 50bps cut.
- The focus now shifts to the first US presidential debate, which could influence pre-election market sentiment.
Gold prices rose in the North American mid-session on Tuesday, up around 0.30% as traders prepared for the crucial August inflation report from the US. This, coupled with the first presidential debate between Vice President Kamala Harris and former President Donald Trump, could impact financial markets. XAU/USD is trading at $2,514, bouncing off the intraday low of $2,500.
Market sentiment improved slightly and the dollar pared some of its earlier gains, which is a boon for gold. Treasury yields fell ahead of the release of the latest Consumer Price Index (CPI), which is expected to justify a dovish stance from the Federal Reserve to begin a rate cutting cycle amid fears of a weakening labor market.
The latest U.S. jobs report showed the economy added fewer people to the workforce than expected, but the unemployment rate fell slightly, coming as a relief to Federal Reserve policymakers.
Meanwhile, in the swaps market, the probability of a 50 basis point cut has risen to 33%, while the probability of a 25 basis point cut is 67%, according to the CME FedWatch tool. Earlier, a Reuters poll found that 92 of 101 economists expect the Federal Reserve to cut interest rates by 25 basis points (bps) when it meets on September 17-18.
Political developments are sure to start catching attention ahead of the US presidential elections on November 5. Vice President Kamala Harris and Donald Trump are set to hold their first debate on Tuesday at 9pm ET (1am GMT) on ABC.
Daily Digest Market Trends: Gold prices rise as traders focus on US CPI
- Gold prices rose on Tuesday as the US dollar erased the previous day's gains. The US Dollar Index (DXY), which tracks the greenback against six currencies, was almost flat at 101.62.
- The yield on the 10-year U.S. Treasury note fell 5 basis points to 3.648%, reflecting traders' positioning ahead of the Sept. 18-19 session.
- U.S. CPI is expected to fall to 2.6% year-on-year from 2.9% in August, while core 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 108 basis points (bps) this year, based on December 2024 federal funds rate futures contracts, according to data from the Chicago Board of Trade (CBOT).
Technical Outlook: Gold prices maintain gains above $2,500
From a technical perspective, XAU/USD has been steadily rising but has failed to surpass the all-time high of $2,531 as traders prepare for a key data release on Wednesday. Based on a nearly flat Relative Strength Index (RSI), momentum is pointing to gold continuing to trade sideways.
If gold breaks through the all-time high, the next resistance would be at $2,550 and if this is breached, the next stop would be a psychological $2,600.
Conversely, if gold prices sink below $2,500, the next support is at the August 22 low of $2,470. On a further decline, the next demand zone is the confluence of the support-turned-May 20 high and the 50-day simple moving average (SMA) between $2,450 and $2,440.
Federal Reserve FAQs
Monetary policy in the United States is set by the Federal Reserve (FRB), which has two mandates: to promote price stability and full employment. Its primary tool for achieving these goals is adjusting interest rates. When prices rise sharply and inflation exceeds the Fed's 2% target, the Fed raises interest rates, increasing borrowing costs across the economy. As a result, the United States becomes a more attractive place for international investors to park their funds, and the US Dollar (USD) strengthens. If inflation falls below 2% or unemployment is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the USD.
The Federal Reserve Board (FRB) meets eight times a year, where the Federal Open Market Committee (FOMC) assesses the state of the economy and sets monetary policy. The FOMC is attended by 12 Fed officials: the seven members of the Federal Reserve Board, the President of the Federal Reserve Bank of New York, and four of the remaining 11 regional reserve bank presidents. These presidents serve rotating one-year terms.
In extreme circumstances, the Federal Reserve may resort to a policy known as quantitative easing (QE). QE is a process in which the Federal Reserve dramatically increases the flow of credit in a distressed financial system. It is a non-standard policy tool used during crises or when inflation is extremely low. It was the tool of choice for the Federal Reserve during the 2008 financial crisis. This means that the Federal Reserve prints more dollar bills and uses them to buy higher-quality bonds from financial institutions. QE typically weakens the US dollar.
Quantitative tightening (QT) is the reverse process of QE, where the Fed stops buying bonds from financial institutions, reinvesting the principal of maturing bonds and not buying new bonds. This is usually positive for the value of the US dollar.
