September Rate Cut Reawakens Gold Bulls

Gold (XAU/USD) Analysis

• Gold prices to remain sensitive to dovish rate expectations, softer USD and yields
• September Fed rate cut fully priced in
• Major catalyst required to resuscitate suppressed gold volatility
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Gold Prices to Remain Sensitive to Dovish Rate Expectations

Gold has appreciated, buoyed by last week’s lower US CPI data with the path of least resistance to the upside. The precious metal thrives in a low interest rate environment and the mere anticipation of a rate cut from the Fed in September has re-awoken gold bulls.

The precious metal had been hovering around the 161.8% Fibonacci extension of the major 2020 – 2022 decline before the reacceleration to the upside. Gold prices subsided after reaching a new all-time high in May as China, the world’s largest purchaser of the precious metal, dialed back its monthly purchases.

Gold (XAU/USD) Daily Chart

Source: TradingView, prepared by Richard Snow

The gold outlook is likely to will depend on whether a combination of a lower dollar and US yields can reinvigorate bullish demand at already elevated prices. However, at the heart of the recent move is the greater expectation of a Fed rate cut in September. Markets have fully priced in the cut and have opened the door to two rate cuts by year end with a 50% chance of a third.

CME FedWatch Tool Showing Rapid Change in Rate Cut Expectations

Source: CME FedWatch Tool, prepared by Richard Snow

The weekly chart reveals the difficulty in pushing consistently above the prior high, as gold bulls failed to maintain upward momentum above $2,450 an ounce.

Gold (XAU/USD) Weekly Chart

Source: TradingView, prepared by Richard Snow

Gold volatility has subsided now that tensions in eastern Europe and the Middle East have cooled, although, fighting carries on. 30-day implied gold volatility (GVZ) has picked up more recently but it will take a major catalyst from here to entice buyers to return in a meaningful way to sustain prices well above the all-time high.

Source: TradingView, prepared by Richard Snow

— Written by Richard Snow for DailyFX.com

Contact and follow Richard on Twitter: @RichardSnowFX