Gold (XAU/USD) is struggling to capitalise on the modest gains it recorded over the past two days, trading with a negative bias on Wednesday near $2312.34.
However, the decline lacks follow-through as traders cautiously await the latest U.S. consumer inflation figures and the Federal Open Market Committee (FOMC) meeting results later today. These events are expected to provide new signals regarding when the Federal Reserve might start lowering interest rates, determining the near-term trajectory of the non-yielding gold price.
From my perspective, due to the rare occurrence of such critical data and events being released on the same day, investors have tempered their expectations for the Federal Reserve to ease monetary policy in September amid a strong U.S. labour market and stable inflation.
This has helped the dollar trade steadily near a one-month high, as a key negative factor for the gold price. However, the downside appears limited due to renewed political uncertainty in Europe and ongoing geopolitical tensions, which calls for caution regarding new gold short positions.
On Wednesday, the markets expect U.S. interest rates to remain high for an extended period, which impacts the gold price.
Last Friday’s U.S. Non-Farm Payroll (NFP) data indicated that the resilient labourmarket and rising wages might continue to drive inflation higher.
This has in turn reduced the likelihood of the Federal Reserve considering a rate cut in September. Therefore, in my opinion, maintaining higher interest rates for longer increases the opportunity cost of holding non-yielding gold, making it less attractive to investors.
Investors are now keenly awaiting the U.S. Consumer Price Index (CPI) data for May to gain insights into the current inflation trajectory. Prices are expected to rise by 0.1% month-on-month and 3.4% year-on-year.
Core prices are expected to increase by 0.3% and 3.5%, respectively. In my view, higher-than-expected readings would reinforce the inflation narrative suggested by the employment data, diminishing the likelihood of a September rate cut, which currently stands at 53%, making November the most likely month for the Federal Reserve to begin cutting rates. Such a scenario could prompt a bearish reaction in gold.
Following the CPI data, the FOMC minutes will be released. Although the Federal Reserve is not expected to change interest rates, investors anticipate updates to the Summary of Economic Projections (SEP) or the “dot-plot,” which provides a graphical representation of how Fed members see future rate developments.
Notably, the dot plot currently indicates the Fed cutting rates three times in 2024 by 0.25% each. Given the recent strong NFP data—pending CPI release—this number might be lower in September. If so, traders could sell gold.
I believe that the markets are still pricing in the low odds of an imminent rate cut by the Fed in September, alongside China’s decision to pause gold purchases, which are key factors limiting gold’s upside.
Current market prices suggest that the Fed might only cut rates by 25 basis points this year, either at the November or December policy meeting, which continues to support the U.S. dollar. The U.S. Dollar Index (DXY) is standing tall near its highest level since May 9, adding pressure on the dollar-denominated commodity.
It seems to me that traders are now hesitant and prefer to wait for more signals about the potential timing of the Federal Reserve’s rate cuts before placing new directional bets on gold prices. Therefore, the focus will remain on today’s U.S. consumer inflation figures and the critical FOMC policy decision.
