Gold price clings to gains above $2,400 as traders price in Fed’s fat rate cuts

• Gold price falls slightly but remains broadly firm on multiple tailwinds on Friday.
• Investors are divided over the size of Fed rate cuts in September.
• Fed officials acknowledge the softening of inflation and slowing labor demand.

Gold price (XAU/USD) edges lower from a three-day high near $2,430 in Friday’s European session but holds above the key support level of $2,400. The precious metal’s near-term outlook remains firm on strong speculation that the Federal Reserve (Fed) will start reducing interest rates in September.

However, investors are divided about whether the Fed will exhibit aggressiveness in the process of pivoting to policy normalization by announcing a 50 basis point (bp) interest-rate reduction or will cut them by 25 bps. 

According to the CME FedWatch tool, 30-day Federal Funds futures pricing data shows that traders see a 54.5% chance that interest rates will be reduced by 50 bps in September. For the entire year, data suggests a 100 bp reduction in interest rates by the Fed.

Meanwhile, the US Dollar (USD) and bond yields correct after failing to hold gains driven by lower-than-expected United States (US) Initial Jobless Claims for the week ending August 2. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, drops to nearly 103.15 from a four-day high of 103.50. The 10-year US Treasury yields slump to near 3.97%.

The data, released on Thursday, showed that the number of individuals claiming jobless benefits for the first time was lower at 233K than estimates of 240K and the prior release of 250K (upwardly revised from 249K). Though the jobless claims slowed, the data is insufficient to diminish market expectations for sooner rate cuts.

Daily digest market movers: Gold price capitalizes on multiple tailwinds

• Gold price clings to gains above $2,400 on firm Fed rate-cut prospects and lingering geopolitical conflicts. Expectations for aggressive rate cuts were prompted by a recent stock market rout that was driven by fears of a potential US economic slowdown due to a sharp deceleration in job growth and the rising Unemployment Rate.
• Fed policymakers have been acknowledging cooling labor market conditions and are confident that inflation has returned to its path, leading to the bank’s target of 2%. Officials have cleared that their decisions will be based on economic data, not on stock market mayhem and political considerations.
• On Thursday, Chicago Fed Bank President Austan Goolsbee said: "We're not in the business of responding to the stock market. We're in the business of maximizing employment and stabilizing prices," Reuters reported.
• Meanwhile, escalating Middle East tensions continue to improve Gold’s appeal as a safe haven. Investors worry that Iran could retaliate for the killing of the Hamas leader by an air strike in Tehran.
• Going forward, the Gold price will be influenced by the US Consumer Price Index (CPI) data for July, which will be published on Wednesday. The inflation data will indicate whether current market expectations for rate cuts are appropriate.

Technical Forecast: Gold price oscillates in Channel formation

Gold price trades in a channel formation on a daily timeframe, which is slightly rising but broadly exhibited a sideways performance for more than three months. The 50-day Exponential Moving Average (EMA) near $2,370 continues to provide support to the Gold price bulls. 

The 14-day Relative Strength Index (RSI) oscillates within the 40.00-60.00 range, suggesting indecisiveness among market participants.

A fresh upside would appear if the Gold price breaks above its all-time high of $2,483.75, which will send it into unchartered territory.

On the downside, the upward-sloping trendline at $2,225, plotted from the October 6 low near $1,810.50, will be a major support in the longer term.