Gold rallies after the Fed Chairman has spoken

LONDON (July 16) Gold (XAU/USD) is up over half a percent on Tuesday, trading in the $2,440s as it inches up toward the $2,451 all-time high. The rally in the yellow metal is being supported by heightened expectations that the Federal Reserve (Fed) will cut interest rates at their meeting in September as inflation continues to show signs of cooling.  

The firmer expectations that interest rates will be lowered contrast with the Fed’s previous non-committal, ambiguous stance. Lower interest rates are positive for Gold because they lower the opportunity cost of holding the non-interest-bearing asset. 

Gold rises after Fed Chairman Powell indicates cuts are on their way

Gold is rising after Fed Chairman Jerome Powell commented in a speech on Monday on how inflation was showing promising signs of progress toward the central bank’s target and hinted that cuts to interest rates were on their way. His comments led to a dramatic recalibration of market-based expectations for the trajectory of the Fed Funds rate, the Fed’s key monetary policy rate. 

The CME FedWatch tool, which uses the price of 30-day Fed Funds futures to calculate probabilities of future rate changes, is now pricing in a 100% chance of at least a 0.25% cut in the Fed Funds rate to an upper band of 5.25% when the Fed meets in September. Prior to the Chairman’s comments, the probabilities had been hovering just above the 60% mark. 

The change in outlook comes after US inflation data in the form of the Consumer Price Index (CPI) undershot expectations in June – falling to 3.0%. Before that,both headline and core Personal Consumption Expenditure (PCE) inflation data – the Fed’s preferred gauge – fell to 2.6% in May, also undershooting expectations. 

FXStreet