- Last week, gold gained as US data pointed to a slowdown in the economy.
- Powell said that inflation was still above the 2% target.
- Gold traders are now eyeing the US Consumer Price Index.
Gold prices edged higher on Tuesday despite a surge in the dollar and Treasury yields after Fed Chair Powell’s hawkish speech. Meanwhile, investors were preparing for the US inflation report coming on Thursday for clues on Fed rate cuts.
Gold (Source: Bloomberg)
Last week, gold reached the highest level since May as the US nonfarm payrolls report showed weaker job growth and rising unemployment. According to the report, the US economy added 206,000 jobs, smaller than the previous month. At the same time, the labor department revised the figures for the previous month lower. Meanwhile, the unemployment rate unexpectedly jumped to 4.1% from 4.0%.
The report led to a surge in Fed rate cut expectations which boosted the yellow metal. Meanwhile, the dollar fell, making gold cheaper for overseas buyers and increasing demand.
This week, investors had expected Powell to assume a more dovish tone after the downbeat employment numbers. However, when he spoke on Tuesday, he maintained caution. Powell said that inflation was still above the 2% target. Therefore, policymakers needed more confidence that it would reach the target. Still, he noted that there had been significant improvement. Therefore, although it was not as dovish as expected, the speech was also not hawkish.
Furthermore, the US central bank chair said that there was a greater risk that high interest rates would hurt the labor market. Therefore, the Fed now has to balance between inflation and growth. Initially, investors had priced in a 76% chance of a Fed cut in September. After Powell’s testimony, this likelihood fell slightly to 73%.
Gold traders are now eyeing the US Consumer Price Index on Thursday. Forecasts show price pressures easing to 3.3% annually and increasing slightly by 0.1% monthly. If inflation continues its current downtrend, gold prices will rally as the Fed gets nearer to lowering interest rates. On the other hand, if inflation beats forecasts, the US central bank will keep holding high interest rates. Moreover, rate cut expectations will fall.
Although geopolitical tensions in the Middle East continue, the impact on markets has fallen. At the same time, political uncertainty in the Eurozone and the UK has eased. Therefore safe-haven demand for gold has gone down. Therefore, all focus is now on the Federal Reserve’s policy outlook.
