- Forecasts show the US economy expanded by 2.0% in the second quarter.
- The core PCE index might show an increase in inflation of 2.5% in June.
- A Reuters poll revealed that the Fed will cut rates in September and December.
Gold prices ended higher on Tuesday, rebounding ahead of more US economic data this week. At the same time, news that India, the second largest consumer of gold, cut import duties improved the demand outlook for gold, boosting prices.
Gold traders eagerly await GDP and inflation data from the US, which will come later in the week. These reports will shape the outlook for Fed rate cuts. Forecasts show that the US economy expanded by 2.0% in the second quarter, faster than the 1.4% expansion in the first quarter. Such an improvement would likely boost the dollar and weigh on gold prices. A still resilient economy might insert some caution in policymaker speeches ahead of the September policy meeting.
US inflation (Source: Bureau of Economic Analysis, Bloomberg)
Meanwhile, the core PCE index might show an increase in inflation of 2.5% or lower, which would indicate a slight easing from May’s 2.6%. Furthermore, it would bring price pressures closer to the Fed’s 2% target. Softer-than-expected inflation figures this month have boosted expectations for a rate cut in September. This, in turn, has led to a decline in the dollar and Treasury yields, benefiting gold. The yellow metal reached an all-time high last week due to rate cut optimism.
A Reuters poll on Tuesday revealed that the Fed will cut rates in September and December. However, economists noted that there will be caution despite easing inflation because the US economy remains resilient. Last week’s retail sales report showed that US consumers spent more than expected. At the same time, GDP estimates show expectations for more expansion in the second quarter. Therefore, it will be a delicate balance for the Fed to ensure there is no spike in inflation after it starts its rate-cutting cycle.
Elsewhere, reports showed that India cut import duties on silver and gold from 15% to 6%. This cut will likely increase demand for gold as it makes it cheaper to import. An increase in demand for the second-largest consumer will likely boost global prices.
The current fundamentals support further upside for gold prices. The Federal Reserve is in a better position to start lowering borrowing costs. As a result, 10-year Treasury yields have dropped by over 25bps this month, increasing the appeal for non-yielding gold.
