Gold Holds Gains Above $2,400 on Sizable Fed Rate Cut Prospects

• The price of gold is slightly lower but remains broadly firm on several tailwinds on Friday.
• Investors are divided on the size of the Fed’s rate cuts in September.
• Fed officials acknowledge easing inflation and slowing job demand.

The price of gold (XAU/USD) is falling from a three-day high near $2,430 in the European session on Friday, but is holding above the key support level of $2,400. The precious metal’s short-term outlook remains firm on strong speculation that the Federal Reserve (Fed) will begin cutting interest rates in September.

However, investors are divided on whether the Fed will be aggressive in its pivot to policy normalization by announcing a 50 basis point (bp) interest rate cut or cut them by 25 bp.

Data on 30-day Federal Funds futures prices show traders see a 54.5 percent chance that interest rates will be cut by 50 bps in September, according to CME’s FedWatch tool. For the full year, the data suggests a 100 bp cut in interest rates by the Fed.

Meanwhile, the U.S. dollar (USD) and bond yields are flat after failing to hold on to gains driven by lower-than-expected United States (US) initial jobless claims for the week ending August 2. The U.S. Dollar Index (DXY), which tracks the greenback against six major currencies, fell to near 103.15 from a four-day high of 103.50. US 10-year Treasuries fall to nearly 3.97%.

The data, released on Thursday, showed that the number of people claiming jobless benefits for the first time was lower at 233,000 than estimates of 240,000 and the previous release of 250,000 (revised upwards from 249,000). Although jobless claims have slowed, the data is insufficient to dampen market expectations for faster rate cuts.

Daily Market Reasons: Gold Price Capitalizes on Multiple Tailwinds

• The price of gold is clinging to gains above $2,400 on the firm outlook for Fed rate cuts and lingering geopolitical conflicts. Expectations for aggressive rate cuts have been driven by a recent stock market crash that was driven by fears of a potential U.S. economic slowdown due to a sharp deceleration in job growth and a rising unemployment rate.
• Fed policymakers have acknowledged cooling conditions in the labor market and are confident that inflation is back on track, leading to the bank’s 2 percent target. Officials clarified that their decisions will be based on economic data, not stock market chaos and political considerations.
• On Thursday, Federal Reserve Bank of Chicago President Austan Goolsbee said: “We are not in the business of responding to the stock market. We are in the business of maximizing employment and stabilizing prices,” Reuters reported.
• Meanwhile, escalating tensions in the Middle East continue to enhance Gold’s safe-haven appeal. Investors fear that Iran could retaliate for the killing of the Hamas leader with an airstrike in Tehran.
• Going forward, the price of gold will be influenced by US consumer price index (CPI) data for July, which will be released on Wednesday. Inflation data will indicate whether current market expectations for rate cuts are appropriate.

Technical Forecast: Gold Price Oscillates in Channel Formation

The price of gold is trading in a channel formation on a daily time frame that is slightly rising, but has generally shown a sideways performance for more than three months. The 50-day exponential moving average (EMA) near $2,370 continues to provide bullish support for the gold price.

The 14-day Relative Strength Index (RSI) is hovering in the 40.00-60.00 range, suggesting indecision among market participants.

A new upside would emerge if the price of gold breaks its all-time high of $2,483.75, sending it into uncharted territory.

On the downside, the uptrend line at $2,225 drawn from the October 6 low near $1,810.50 will be a major long-term support.