Gold trades above $2,500 as 50 bps rate cut bets dwindle
LONDON (September 10) Gold (XAU/USD) is exchanging hands just above the $2,500 mark on Tuesday, sticking within its familiar range of the last few weeks as traders assess the outlook for monetary policy and the future path of interest rates in the US, a key performance indicator for Gold.
Recent mixed US jobs’ data brought into doubt market expectations of the Federal Reserve (Fed) making an above-standard 0.50% (50 bps) cut to its fed funds rate at the September 18 meeting. This, in turn, had a negative impact on Gold, which tends to appreciate the more interest rates fall because that increases its attractiveness to investors as a non-interest paying asset.
Gold: Focus on US inflation and geopolitics
Gold rose then fell after the Nonfarm Payrolls report on Friday, as although the headline figure showed the US economy added fewer jobs than expected in August, the Unemployment Rate fell to 4.2% from 4.3% as anticipated, and wage growth increased above forecasts.
Taken as a whole, the report indicated that the labor market was not in as bad shape as first thought and that wage inflation was rising. As a result, market-based probabilities of the Fed cutting interest rates by 0.50% actually fell from around 40% to around 30%.
After an initial spike, Gold quickly rolled over and ended the week back down at around the $2,500 mark before inching slightly lower into the $2,490s on Monday. On Tuesday, Gold has edged back just above $2,500.
Investors now await US Consumer Price Index (CPI) and Producer Price Index (PPI) data for August, which will be out on Wednesday and Thursday, respectively, for more intel on the outlook for interest rates. Although analysts are mixed as to how much of an impact inflation data will now have on policy expectations, some, such as Deutsche Bank’s Head of Macro Research, Jim Reid, play down the importance of inflation compared to employment data.
“Wednesday's US CPI and Thursday's PPI will probably help move that debate on, but it seems employment is more important at the moment and Friday's mixed employment report had arguments for both sides, so the swing factor is probably how the committee view labor markets rather than inflation,” said Reid in his “Early Morning Reid” macro note.
On the geopolitical risk front, the war in Gaza escalates after the Israelis bombed a displaced civilian camp in southern Gaza, killing 33 people in a single day, according to Al Jazeera News. US efforts at brokering a ceasefire deal now seem even less likely to succeed than a few days ago.
Meanwhile, in the other geopolitical hotspot of Ukraine, Russian forces continue to close in on the key logistics hub city of Pokrovsk despite gains by Ukraine in Russia’s Kursk region.
Overall, the heightening tensions are probably supporting Gold, given its safe-haven status.
FXStreet
