Gold prices pulled back during Friday’s Asian session as profit-taking and a firmer US Dollar weighed on the yellow metal. Despite the setback, expectations for a rate cut by the US Federal Reserve (Fed) in September helped prevent deeper losses, with traders closely monitoring the release of the US Personal Consumption Expenditures (PCE) Price Index later on Friday.
Key Drivers Behind the Gold Price Movement
Gold (XAU/USD) saw a modest decline after hitting a five-week high of $3,425 in the previous session, retreating from that level amid profit-taking and a strengthening US Dollar. A series of stronger-than-expected US economic data, including the second estimate of Q2 GDP growth and a dip in weekly Initial Jobless Claims, provided support to the greenback, putting downward pressure on the USD-denominated gold price.
However, despite these headwinds, the precious metal remained supported by growing expectations that the Federal Reserve would cut interest rates in its upcoming September meeting. Fed Governor John Williams recently made dovish comments, signaling a likely interest rate reduction to support the US labor market. Lower interest rates would decrease the opportunity cost of holding non-yielding gold, potentially boosting demand for the yellow metal.
What to Expect from the US PCE Data
The release of the US PCE inflation data later today will be a key event for markets, especially gold traders. The headline PCE is expected to show a 2.6% year-over-year (YoY) increase in July, while the core PCE, which excludes volatile food and energy prices, is projected to rise by 2.9%. These figures will offer insights into the current inflationary pressures and help shape expectations for the Fed’s future monetary policy actions.
Strong inflation readings could weigh on gold, especially if they signal that the Fed’s planned rate cuts may not happen as soon as expected. Conversely, any signs of persistent inflationary pressures or weaker-than-expected data could strengthen the case for monetary easing and bolster gold prices.
Key Market Movers for Gold
- US Dollar Strength: The dollar saw some strength due to stronger economic data, such as the US Q2 GDP, which came in at 3.3%, higher than the initial estimate of 3.0%. Additionally, US Initial Jobless Claims fell to 229,000, better than the expected 230,000. This has contributed to a stronger dollar, putting pressure on gold, which tends to move inversely with the dollar.
- Fed Rate Cut Expectations: Despite the firmer dollar, the expectation of a rate cut by the Fed in September continues to provide support to gold. Currently, traders are pricing in an 85% chance of a 25 basis point (bps) rate cut, as per the CME FedWatch tool. Fed Governor Christopher Waller’s comments supporting a rate reduction further bolster these expectations.
- Geopolitical Risks and Safe-Haven Demand: Concerns over the ongoing US-China trade tensions and rising political uncertainty around the US Federal Reserve’s independence are additional drivers for gold. The announcement by President Donald Trump to remove Fed Governor Lisa Cook has raised questions about the Fed’s political independence, driving some investors to seek safe-haven assets like gold.
Gold Technical Analysis: Maintaining a Bullish Outlook
Despite the recent pullback, gold continues to maintain a constructive outlook, with the price holding above the key 100-day Exponential Moving Average (EMA) on the daily chart. The upward momentum is supported by the 14-day Relative Strength Index (RSI), which stands at a healthy level near 60.50, indicating bullish momentum in the near term.
Resistance Levels:
- The immediate resistance for gold lies at the upper boundary of the Bollinger Band at $3,425, followed by the psychological level at $3,439. A sustained break above this level could push gold toward $3,500, which aligns with the high seen in April.
Support Levels:
- On the downside, the initial support is seen around $3,373 (the low of August 27). If gold drops below this level, further support may be found at $3,351, the low of August 26, and $3,310, the lower limit of the Bollinger Band.
Looking Ahead: Focus on US PCE and Fed Policy
Gold traders will be closely watching today’s US PCE data for further direction. A hotter-than-expected inflation report could undermine the case for immediate rate cuts and put downward pressure on gold. On the other hand, weaker-than-expected data could further fuel expectations of a rate cut and provide support for gold.
In the longer term, gold remains well-positioned as a hedge against inflation and a store of value, especially amid ongoing political and economic uncertainties. As the market digests the Fed’s next move and any developments in the broader geopolitical landscape, gold could continue to find support from safe-haven demand and the prospect of looser monetary policy.
In conclusion, while gold faces short-term headwinds from the strengthening US dollar and profit-taking, the precious metal remains poised for further upside if the Fed follows through with its dovish stance. With inflation data and Fed commentary in focus, gold traders should be prepared for potential volatility in the coming sessions.
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