Gold prices (XAU/USD) drifted lower to around $2,500 during early Asian trading hours on Monday. The decline in gold prices is largely attributed to the strengthening of the US Dollar (USD). Despite this pressure, the potential for a September interest rate cut by the US Federal Reserve (Fed) may limit further declines in gold prices.
US Economic Data Influences Gold Market
On Friday, the Commerce Department reported that the US Personal Consumption Expenditures (PCE) Price Index increased by 0.2% month-over-month (MoM) in July, aligning with market expectations. Year-over-year, PCE inflation held steady at 2.5% in July. The core PCE, which excludes volatile food and energy prices, also rose by 0.2% for the month, and 2.6% compared to a year ago. This annual figure was slightly below the expected 2.7%.
Alex Ebkarian, Chief Operating Officer at Allegiance Gold, noted that the PCE report indicates inflation is no longer the Fed’s primary concern. Instead, the Fed appears to be shifting its focus to unemployment data, reinforcing the possibility of rate cuts in September.
Expectations for Fed Rate Cuts Support Gold Prices
Following the PCE inflation report, traders have slightly increased their expectations for a 25 basis points (bps) rate cut by the Fed in September, now standing at around 70%. The possibility of a 50 bps reduction is estimated at 30%, according to the CME FedWatch tool. These expectations for a lower Fed rate are likely to support gold prices in the near term, as reduced interest rates diminish the opportunity cost of holding non-yielding gold.
Middle East Tensions and Safe-Haven Demand
In other news, Israel’s largest labor group has planned a nationwide strike on Monday, aiming to pressure the government into a Gaza cease-fire and secure the release of hostages held by Hamas, according to Bloomberg. Investors will be closely monitoring developments in the Middle East. Escalating tensions in the region could increase safe-haven demand, potentially benefiting gold prices.
Concerns Over Physical Demand and China’s Economy
However, concerns about physical gold demand and a sluggish economy in China may limit the precious metal’s upside potential. China, the world’s largest buyer of gold, is expected to release its Caixin Manufacturing PMI for August on Monday. The index is forecasted to improve to 50.0 from 49.8 previously. A weaker-than-expected outcome could put additional pressure on the XAU/USD price.
Conclusion
In summary, while gold prices have softened due to a stronger US Dollar, expectations of a potential rate cut by the Fed and geopolitical tensions in the Middle East could provide support. However, challenges such as concerns over physical gold demand and China’s economic performance may cap significant gains for gold in the near term.
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