- US retail sales jumped by 0.1%, compared to forecasts for a 0.2% drop.
- Uncertainty about the expected size of Fed rate cuts could cause volatility.
- Gold traders will pay attention to Powell’s remarks after the policy meeting.
Gold prices recovered on Wednesday after falling in the previous session as US data supported the case for a gradual pace of Fed rate cuts. Initially, prices rose as the likelihood of a 50-bps rate cut rose last week. However, despite the slight pullback, investors remain optimistic about a looming Fed rate cut.
Data on Tuesday revealed that US retail sales jumped by 0.1%, compared to forecasts for a 0.2% drop. The unexpected increase in sales showed a resilient economy favoring a small Fed rate cut to begin the easing cycle. Consequently, gold prices retreated. However, after several months of waiting, the Fed will finally pivot and start lowering borrowing costs later in the day. Market participants remain uncertain about the size, with the likelihood of a 50-bps cut at 63%.
Fed rate cut expectations have fluctuated since the August nonfarm payrolls report. At first, the poor jobs report raised fears of a recession, pushing market participants to fully price a 50-bps rate cut. However, after that, expectations slowly shifted back to a 25-bps rate cut with incoming data.
Last week, US consumer and producer inflation reports showed bigger-than-expected increases, solidifying bets for a small rate cut. However, expectations surged late on Thursday after dovish reports by major US news outlets. Gold benefits when rate cut expectations increase. The faster the Fed cuts rates, the quicker the non-yielding gold becomes appealing.
Nevertheless, uncertainty about the expected size of rate cuts could cause volatility in either direction. If the Fed settles on a super-sized cut, gold could rally since the market has yet to fully price such an outcome. On the other hand, if the central bank cuts by 25-bps, prices might tumble due to disappointment.
Furthermore, gold traders will pay attention to Powell’s remarks after the meeting for clues on the future. A dovish message will be positive for the yellow metal. Meanwhile, a cautious message will likely hurt prices.
Spot gold (Source: Bloomberg)
Gold has gained since the year began due to rate cut optimism. The time has come for the Fed to finally start its easing cycle, which could further boost prices. Nevertheless, market participants will keep watching incoming US data for clues on how fast the US central bank will cut rates.
