The price of gold (XAU/USD) is attempting to rise, rebounding from levels near $2,315 during Monday’s trading, and is currently trading at $2,325.
This comes as the US dollar corrects amid strong expectations that the Federal Reserve will cut interest rates twice this year.
The US Dollar Index (DXY) fell to 105.60 points amid declining inflationary pressures in the United States.
The US Consumer Price Index (CPI) report showed that price pressures decreased more than expected in May. Additionally, the preliminary Global PMI report from Standard & Poor’s for June indicated signs of a moderate slowdown in growth, meaning that sales price inflation fell to its lowest level in five months in June.
However, the rate of increase fell to its lowest level in five months in the services sector, where the rise was among the lowest seen in the past four years, and to a six-month low in the manufacturing sector.
The data suggests that the central bank will start easing monetary policy at the September meeting, with subsequent rate cuts in November or December. The 30-day federal fund futures pricing data indicates a 66% chance of a rate cut in September.
In my view, Federal Reserve officials will likely cut interest rates only once this year and may postpone any action until next year. They want to see inflation decline for several months before shifting to rate cuts.
Thus, I believe the price of gold started a modest upward correction when it rebounded near $2315 after a sharp decline on Friday. Gold faced intense selling pressure as the US dollar rose following the unexpectedly positive preliminary Global PMI report from Standard & Poor’s for June, which showed that economic activity expanded unexpectedly and at a faster pace. The unexpectedly optimistic US PMI report also boosted the US dollar, making gold more expensive for foreign currency holders and exerting downward pressure on prices.
After the composite PMI unexpectedly jumped to 51.7, I believe the PMI data corresponds to economic growth at an annual rate of slightly less than 2.5%. The economy continues to grow, led by the services sector, reflecting strong domestic spending. However, recent gains, in my opinion, are supported by the ongoing recovery in the manufacturing index, which is experiencing its best growth wave in two years during 2024.
From my perspective, investors will focus heavily on this week’s first-quarter GDP data and the core Personal Consumption Expenditures (PCE) Price Index for May. The core PCE Price Index is the Federal Reserve’s preferred measure of inflation, providing new signals about when and how much the Fed will cut interest rates this year.
On the global and geopolitical front, the security agreement between Russian President Vladimir Putin and North Korean leader Kim Jong Un in Pyongyang has raised the risk of escalating geopolitical tensions. In a comprehensive treaty covering political, trade, investment, and security cooperation, North Korea and Russia pledged to use all available means to provide immediate military assistance if either party is attacked.
Rising global tensions, especially talk of a potential Israeli attack on southern Lebanon, could limit the current downward trend in gold prices. However, overall, gold prices’ primary influencer and driver will remain the US Dollar Index and US data in the medium and long term.
