Gold (XAU/USD) is attracting some selling pressure in the early hours of Thursday and is trading near the psychological level of $2,500, as the US dollar gains some positive momentum driven by the recent modest rise in bond yields.
It now appears to have broken a four-day losing streak, reaching its lowest level of the year so far.
For me, this, along with the underlying bullish sentiment in global financial markets, is a key factor undermining the precious metal’s safe-haven appeal.
However, I believe that the Federal Reserve’s expectations of rate cuts may limit the recovery of the US dollar and provide support for gold prices.
Data released on Wednesday showed that job growth in the United States over the past year through March was weaker than initially estimated. Additionally, the minutes from the Federal Open Market Committee’s (FOMC) July meeting revealed that several officials were inclined to cut interest rates immediately. This has reinforced expectations of an imminent start to a monetary easing cycle by the Federal Reserve in September, which would benefit the non-yielding gold.
In my view, the lack of progress in reaching a ceasefire agreement in Gaza is a driver of market concerns about a broader conflict in the Middle East, limiting market optimism. This would further contribute to the weakness of any decline in safe-haven gold, warranting some caution from traders before confirming that gold prices have peaked in the near term and will undergo a downward correction.
I believe that the US dollar’s decline to its lowest level of the year in response to data indicating that the labour market was not as strong as expected helped gold prices reverse their daily decline to levels above $2,500. Markets are now pricing in a 38% probability of a 50 basis point rate cut next month, up from 29% yesterday, and nearly 100 basis points of easing by the end of this year, which supports the non-yielding gold.
Traders are now awaiting the release of key US economic data, including the initial weekly jobless claims and existing home sales figures, to find short-term opportunities later in the day, which could support some market volatility in the near term.
However, the market’s focus will remain on Federal Reserve Chairman Jerome Powell’s speech on Friday to determine whether the significantly weaker-than-expected job growth in the United States provides a strong case for a larger rate cut in September. Or if he will return to a hawkish tone, arguing that it is too early to judge the preliminary data and that the Fed needs more confidence in data showing inflation slowing toward its 2% target at a moderate pace. Both scenarios, in my opinion, remain strongly in play.
