- Gold has rallied to all-time highs in September amid an increase in expectations for lower borrowing costs in the US.
- Traders are expecting the Fed to cut rates by 25-bps.
- US retail sales increased by a bigger-than-expected 0.6%.
Gold prices retreated on Wednesday as investors booked profits ahead of the FOMC policy meeting. The decline also came as the dollar strengthened briefly after upbeat retail sales data in the previous session. However, Fed rate cut expectations remained elevated.
Gold has rallied to all-time highs in September amid an increase in expectations for lower borrowing costs in the US. After all the speculation, data, and anticipation, market participants were locking in their profits ahead of the Fed meeting.
Recent data has led experts to predict at least three rate cuts before the end of the year. As a result, markets have already priced some of these moves. If the Fed is as dovish as expected or more dovish, prices will likely remain steady or climb higher. On the other hand, there is a chance that policymakers will disappoint and fail to give clear guidance on any rate cuts after Wednesday. In such a case, gold would unwind some of its gains.
Furthermore, traders are expecting the Fed to cut rates by 25-bps. However, the rapid and sudden decline in the labor market has pushed some in the government to call for a bigger rate cut. This means there is a chance policymakers will surprise with a 50-BPS rate cut. Such a move would boost gold, a non-yielding asset that performs well in low-interest-rate environments.
US sales (Source: Investing.com)
Elsewhere, data in the previous session revealed some resilience in the US economy. Retail sales increased by 0.6%. Meanwhile, economists had expected it to increase by 0.2%. The report is a significant indicator of consumer spending, alleviating concerns about the economy. As a result, the dollar and Treasury yields recovered, hurting gold.
However, focus remained on the US labor market. Last week, inflation figures also came in slightly hotter than expected. Still, it was not enough to lower rate cut expectations. Moreover, unemployment claims data revealed further weakness in the labor market, supporting bets and gold prices.
Similarly, the retail sales report had little impact on rate cut expectations. The Fed puts more emphasis on the labor sector as it drives a huge part of the economy. Therefore, unexpected weakness piles pressure on the central bank to lower interest rates.