- Gold prices rise as the probability of a 50bps Fed rate cut rises to 59% amid falling US Treasury yields.
- The US Dollar Index (DXY) fell 0.36% to 100.74, boosting the lower-yielding metal.
- Traders are awaiting U.S. retail sales and housing data on Tuesday ahead of the Fed's decision and Chairman Jerome Powell's press conference on Wednesday.
Gold prices recorded a gain of over 0.18% during the North American session on Monday, boosted by a weaker US dollar as traders focused on the Federal Reserve's monetary policy decision on Wednesday. Hopes of a larger-than-expected rate cut have boosted XAU/USD, which is trading at $2,582, bouncing off an intraday low of $2,579.
Market sentiment is mixed ahead of the Federal Reserve decision. Data shows that it is increasingly likely that Chairman Jerome Powell and his colleagues will cut interest rates by 50 basis points (bps). The probability of a 50bps cut has risen to 59% from 50%, while the probability of a 25bps cut is at 41%, according to the CME FedWatch tool.
Gold was also supported by a decline in U.S. Treasury yields, with the 10-year U.S. Treasury yield falling 2.5 basis points to 3.631%, a boon for low-yielding gold.
As a result, the US Dollar came under pressure, with the US Dollar Index (DXY) dropping 0.36% to 100.74.
According to Bloomberg, geopolitically, the risk of an escalation of conflict in the Middle East remains, while the assassination attempt on former U.S. President Donald Trump contributed to the dollar's weakening.
Upcoming U.S. economic events include the release of August retail sales on Tuesday, which are expected to decline from July's strong results and will determine the size of the Fed's interest rate cut, as well as housing data ahead of the Fed decision and Chairman Jerome Powell's press conference later in the week.
Daily Digest Market Trends: Gold Prices Stabilize Above $2,580
- Wall Street economists expect U.S. retail sales to fall 1% to 0.2% from the previous month.
- US industrial production is expected to improve to 0% from a -0.6% contraction in July.
- In addition to the Federal Open Market Committee (FOMC) decision, investors will be keeping an eye on the Summary of Economic Outlook (SEP), particularly the dot plot that shows the future outlook for interest rates.
- The Fed is expected to cut rates by at least 112 basis points this year, based on December 2024 federal funds rate futures contracts, according to data from the Chicago Board of Trade.
XAU/USD Technical Outlook: Gold prices towards $2,600
Gold's uptrend remains intact, supported by strong demand and momentum. The Relative Strength Index (RSI) is in bullish territory and just below the 80 level, a level that traders often consider “extremely” overbought in strong trending conditions.
If XAU/USD breaks out of the all-time high (ATH) at $2,589, the next stop would be at $2,600, above which further upside is likely at the next psychological levels of $2,650 and $2,700.
On the downside, gold sellers will need to push prices below $2,550 to regain control, after which the key support levels are the Aug. 20 high of $2,531, followed by the crucial $2,500 level.
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.
