Gold Prices Forecast: Traders Eye Fed Rate Cuts Amid Cooling Inflation

Gold Prices Slip, Hover Near One-Month High

Gold prices are inching lower on Thursday after shedding earlier gains but remain near a one-month high. This trend is driven by expectations of declining Treasury yields and a weaker U.S. Dollar, influenced by weaker-than-expected U.S. consumer inflation data.

At 10:22 GMT, XAU/USD is trading $2383.785, down $2.345 or -0.10%.

Wednesday’s Recap

On Wednesday, gold surged to near a one-month high, buoyed by a weaker dollar and lower Treasury yields. The U.S. consumer price index (CPI) showed a smaller-than-expected increase in April, bolstering expectations of potential interest rate cuts by the Federal Reserve. The CPI rose 0.3% last month, following a 0.4% rise in March and February, suggesting a cooling trend in inflation. Economists had anticipated a 0.4% monthly increase. This data led to a 0.6% drop in the dollar against a basket of major currencies, enhancing gold’s appeal for foreign investors. Additionally, benchmark 10-year Treasury yields dropped to a one-month low.

Market Expectations

Traders are now pricing in a 74% chance of a U.S. rate cut in September, according to the CME FedWatch Tool. Lower interest rates typically reduce the opportunity cost of holding non-yielding assets like gold. However, analysts express caution regarding the timing of potential rate cuts. Phillip Streible, chief market strategist at Blue Line Futures, remarked that the inflation data could indicate the Fed might soon consider an interest rate reduction.

Analyst Perspectives

Despite the optimistic market reaction, some analysts remain skeptical about imminent rate cuts. Jerome Schneider of PIMCO noted that while lower inflation offers some relief, the Fed’s long-term trajectory remains uncertain. He emphasized that sustained low inflation rates are necessary for the Fed to move closer to its 2% target. Concurrently, Jacob Mitchell of Antipodes Partners highlighted that weak retail sales data, which were flat against expectations of a 0.4% increase, indicate consumer spending is losing momentum. This could ease the Fed’s task of managing interest rates.

Market Forecast: Cautiously Bullish

Given the current market conditions, gold is expected to face resistance at the psychological $2,400 level. While declining inflation and potential rate cuts create a supportive environment for gold, any rebound in the dollar or Treasury yields could pose challenges. Overall, the short-term outlook for gold remains cautiously bullish, contingent on further economic data and Federal Reserve actions.

Technical Analysis

XAU/USD is drifting lower on Thursday after giving back earlier gains. Sellers appeared to step in and long buyers decided to book profits as the market approached the minor high at $2417.92 and the all-time high at $2431.59.

The short-term range is $2431.59 to $2277.34. Its pivot at $2354.47 is the first support, followed by a minor bottom at $2332.11.

The 50-day moving average at $2283.95 is controlling the intermediate uptrend, coupled with the swing bottom at $2277.34.