- Data on Tuesday showed that US sales barely rose in May.
- Investors raised the chances of a Fed cut in September from 61% to 67%.
- Gold prices closed 1.3% higher on Friday amid signs of cooling inflation in the US.
Gold prices rose on Tuesday after poor US economic data raised the likelihood of a rate cut in September and weighed on the US dollar. However, the move was subdued because the market is awaiting more significant data.
US retail sales (Source: US Census Bureau)
Data on Tuesday showed that US sales barely rose in May, missing economists’ forecasts. Sales increased by 0.1% during the month, missing estimates of a 0.3% increase. Additionally, figures for the previous month were revised to show a decline of 0.2% compared to the reported 0.0% growth.
Any sign of weakness in the US economy is bullish for gold. First, weaker data pushes the dollar lower, making gold cheaper for overseas buyers. This increases demand for the yellow metal, which increases prices.
Second, weaker economic activity in the US puts pressure on the Federal Reserve to cut interest rates. Lower borrowing costs benefit gold prices by reducing the opportunity cost of holding the non-yielding asset. After the retail sales report, investors raised the chances of a Fed cut in September from 61% to 67%.
Meanwhile, there was some support from the political uncertainty in the Eurozone, which had investors scrambling for safety. The risk of a financial crisis in France after the snap election announcement has kept traders on high alert.
Notably, gold prices closed 1.3% higher on Friday amid signs of cooling inflation in the US. Both consumer and wholesale inflation figures came in softer than expected, with investors betting on two cuts this year. However, policymakers maintained that the Fed would cut rates only once.
Still, the overall effect of the downbeat inflation data was optimism that the downtrend was back and that the Fed would eventually cut interest rates. So whether the central bank cuts once or twice, market participants have more confidence that it will happen. Consequently, the outlook has become clearer.
Gold was also higher last week due to the panic that had spread across the Eurozone due to political uncertainty. French markets sold off, and investors bought safe-haven assets like the dollar and gold. Gold will continue benefitting if this uncertainty continues.
Markets are now awaiting Friday’s PMI data from the US, which will guide the outlook for interest rates.
