- Friday saw gold prices plunge after an upbeat US jobs report.
- A delay in Fed rate cuts will likely continue to weigh on gold prices.
- Investors are positioning themselves for next week’s US CPI reading.
Gold prices rose on Tuesday, pausing a decline that started on Friday after the US jobs report. The recovery came as the dollar and Treasury yields pulled back from recent highs. However, this decline might be short-lived if fundamentals continue pointing to delayed rate cuts in the US.
Fed rate cut expectations (Source: Bloomberg)
Notably, Friday saw gold prices plunge after an upbeat US jobs report that further lowered expectations for early rate cuts in the US. A strong economy allows the Fed to hold high interest rates for a little longer. At the same time, gold loses its appeal amid high interest rates as it has no yield. Therefore, a delay in rate cuts will likely continue weighing on gold prices.
The narrative for a delay in rate cuts was further confirmed earlier in the week when Fed policymakers Jerome Powell and Neel Kashkari pushed back on rate cut expectations. Powell emphasized that inflation needed to show a consistent downtrend. Meanwhile, Kashkari noted that the US economy was still too hot and needed high interest rates for longer.
Furthermore, data from the US on Monday revealed a strong services sector. The services sector drives a large part of the economy. Therefore, the economy is strong when business activity increases in this sector.
All these factors contributed to the drop in March and May rate cut expectations. This, in turn, hurt the yellow metal. In the coming days, investors will focus on the tone of Fed policymakers. There will be several speeches from policymakers, including FOMC member Bowman. There is a high chance that gold will resume its decline if these speeches are hawkish.
At the same time, investors are positioning themselves for next week’s CPI reading. This figure will play a significant role in the outlook for gold prices. Some experts expect a lower print on US consumer inflation. Such an occurrence would likely lead to a rally in gold prices as it would change the outlook for rate cuts in the US. Moreover, it would be more evidence for the Fed that inflation is in a downtrend.
On the other hand, a higher-than-expected print on consumer inflation could see gold plunge as it would mean higher rates for longer.