Gold prices dipped below $2,500 on Friday, following the release of the US Personal Consumption Expenditure (PCE) data. The report, which is a key inflation indicator for the Federal Reserve, raised the likelihood of a rate cut in September. While the Fed has indicated a cautious approach to monetary policy easing, market participants are increasingly betting on a 25 basis point reduction.
According to the CME FedWatch Tool, traders’ odds for a 25 basis point rate cut have risen to 69%, while the probability of a more aggressive 50 basis point cut has declined to 31%.
Gold prices took a significant hit on Friday, dropping below the $2,500 mark for the second consecutive day. This decline followed the release of the US Personal Consumption Expenditures Price Index (PCE) data for July, which indicated that inflation continues to moderate. As of writing, XAU/USD is trading at $2,497 after reaching a high of $2,526.
The US Bureau of Economic Analysis (BEA) revealed that the core PCE, the Federal Reserve’s preferred inflation gauge, came in slightly below expectations but aligned with June’s figures. This data strengthens the case for the Fed to begin easing its monetary policy at the upcoming September meeting. However, uncertainty remains regarding the magnitude of the initial interest rate cut.
Despite the Federal Reserve’s stated commitment to a gradual approach to interest rate cuts, investors are speculating that a more aggressive reduction, potentially as high as 50 basis points, could be on the table. This sentiment is reflected in the CME FedWatch Tool data. However, the upcoming Nonfarm Payrolls report will play a pivotal role in shaping expectations, especially given Fed Chair Jerome Powell’s recent warning of potential upside risks to employment.
Following the release of the US PCE data, traders have increased their bets on a 25 basis point rate cut by the Fed at the September meeting. The odds for such a cut have risen to 69%, while the likelihood of a 50 basis point reduction has decreased to 31%.
Gold prices are poised for a 2% gain in August, having reached an all-time high of $2,531 on August 20. Looking ahead to the next week, the US economic calendar will be packed with key data releases, including the ISM Manufacturing and Services PMIs, jobs data, and the Balance of Trade.
Federal Reserve Easing Expectations Intensify:
The December 2024 Chicago Board of Trade (CBOT) fed funds future rates contract suggests that investors anticipate a significant easing of monetary policy by the Federal Reserve this year. The market is currently pricing in approximately 97 basis points of rate cuts.
Inflationary Pressures Persist:
While the July core Personal Consumption Expenditures (PCE) reading showed a slight moderation from the previous month, inflationary pressures remain elevated. The core PCE increased by 2.6% year-over-year, slightly below the estimated 2.7%. Headline PCE also came in below expectations, rising by 2.5% year-over-year.
Consumer Spending and Sentiment:
Consumer spending continued to increase, albeit at a slower pace than income growth. This raises concerns about the sustainability of current spending habits. Meanwhile, US consumer sentiment improved slightly in August according to the University of Michigan (UoM), but inflation expectations for the coming year remained relatively high.
Technical Outlook on the Gold Market
Analysing the market from the perspective of the daily chart is still presenting a very strong bullish outlook. The price channel is still uptrending. Although price dipped below the $2,500 threshold, the market actually close for this week slightly above $2,500 price level. The higher lows in the market is consistent, this giving the impression that the market may not be preparing to go down yet though the bulls have not been able to break the resistance level at $2,530.
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