- Rate cut expectations rose on Tuesday after data from the US revealed a decline in service sector activity.
- Central banks around the world are buying more gold.
- Market participants will pay attention to Powell’s testimony to Congress.
Gold prices soared to record highs on Tuesday due to increasing rate-cut expectations. Additionally, the yellow metal got support from a weaker dollar, ongoing geopolitical tensions, and demand from central bank purchases.
US services growth (Source: Institute for Supply Management)
Rate cut expectations rose on Tuesday after data from the US revealed a decline in service sector growth in February as employment fell. A separate report revealed that new orders for manufactured goods fell more than expected in January. These reports showed weakness in the US economy, supporting the view that the Fed will start cutting rates soon.
Resilience in the US economy since the start of the year has contributed to the sharp decline in rate-cut expectations. This, in turn, has weighed on the non-yielding gold, as higher interest rates for longer reduce its appeal. However, recent data has shown pockets of weakness that might pave the way for lower interest rates in the US. Analysts believe the outlook for gold in the next few months is bright because the Fed will eventually start cutting interest rates.
Furthermore, the poor data led to a decline in the dollar, making gold cheaper for foreigners. Consequently, there was increased demand that pushed up prices. Additionally, central banks around the world are buying more gold, contributing to the rising demand. In the last eight months, central banks have been net gold buyers.
Meanwhile, there is also a safe-haven demand for gold amid geopolitical tensions. As the war between Israel and Hamas continues, investors are seeking safety in gold. Moreover, these tensions can bring back inflation driven by rising oil prices. Gold is considered a hedge against inflation.
Gold traders expect major economic reports and a speech from Fed Chair Powell during the week. Notably, markets are awaiting the US employment report, coming on Friday, that might give guidance on the outlook for rate cuts. A higher-than-expected figure for nonfarm payrolls could reverse the rally in gold, as it would lead to a decline in rate-cut bets for June. On the other hand, if the report reveals weakness in the labor market, gold will likely make new highs as bets for a June cut rise.
Market participants will also pay attention to Powell’s testimony to Congress on Wednesday and Thursday. Experts believe he will maintain his hawkish stance, emphasizing patience regarding rate cuts.
