Gold prices have been on the rise recently as US Treasury yields have dropped and the US Dollar has weakened. Traders are eager for the upcoming US Consumer Price Index (CPI) data, with odds showing a 67% chance of a 25 bps reduction in Fed rates and a 33% chance of 50 bps. Additionally, the first US presidential debate between Vice President Kamala Harris and former President Donald Trump could impact market sentiment ahead of the election.
In the mid-North American session on Tuesday, gold prices advanced 0.30% as traders awaited the crucial August inflation report from the US. The XAU/USD trades at $2,514, bouncing off daily lows of $2,500. The market mood has improved slightly as the Greenback has pared some of its earlier gains, which is favorable for the gold market. US Treasury bond yields have fallen ahead of the latest CPI reading, further supporting gold prices. The Fed’s dovish stance towards rate cuts is justified by fears of a weakening labor market.
The latest US jobs report showed that the economy added fewer people to the workforce than expected, but the Unemployment Rate ticked lower, providing some relief for Fed policymakers. Furthermore, the odds for a 25 bps cut have increased to 67%, with a 33% chance of a 50 bps cut, according to the CME FedWatch Tool. Political developments are expected to gain attention ahead of the US Presidential Election on November 5, with the first debate between Vice President Harris and Donald Trump set for Tuesday.
From a technical perspective, XAU/USD is climbing steadily and trades above $2,500. If gold surpasses the all-time high of $2,531, the next resistance level would be $2,550, followed by $2,600. On the other hand, if gold falls below $2,500, the next support level would be at $2,470, with additional support around $2,440-$2,450. The Relative Strength Index (RSI) indicates that gold is likely to continue trading sideways.
The Federal Reserve plays a crucial role in shaping monetary policy in the US, with a focus on achieving price stability and full employment. The Fed adjusts interest rates based on economic conditions – raising rates to curb inflation and lowering rates to encourage borrowing in times of economic downturn. The FOMC, consisting of twelve Fed officials, meets eight times a year to make monetary policy decisions.
In extreme situations, the Fed may resort to unconventional measures such as Quantitative Easing (QE) to increase credit flow in the financial system. QE involves the Fed buying bonds to inject liquidity into the economy, weakening the US Dollar. Conversely, Quantitative Tightening (QT) is the reverse process, where the Fed stops buying bonds and reduces its balance sheet, which typically strengthens the US Dollar. These policies impact market sentiment and investment decisions.
