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