Fed rate cut leads to gold rally
The Fed’s aggressive 50 basis point cut reignited bullish sentiment for gold. Traders had largely expected a 25 basis point cut, but the larger cut shifted expectations, leading to renewed demand for safe-haven assets. Furthermore, markets are now expecting another rate cut in November, which could provide further support for gold as lower interest rates reduce the opportunity cost of holding non-yielding assets such as gold bullion.
The continued weakening of the US dollar – driven by expectations of continued interest rate cuts – added to gold’s appeal to international investors as it becomes cheaper for holders of other currencies.
Geopolitical tensions and central bank demand are strengthening gold
Gold’s performance was further supported by rising geopolitical tensions, especially in the Middle East. Hezbollah’s threats of retaliation against Israel following recent clashes in Lebanon kept markets tense and drove investors to safe havens.
With the conflicts in Gaza and Ukraine still unresolved, gold continues to serve as a hedge against global uncertainties. Moreover, demand from central banks and ETFs continues to grow, further tightening physical supply and increasing upward pressure on prices.
Important economic data is expected
Despite gold’s strong performance this week, traders are becoming increasingly cautious as they await key US economic data next week. Core PCE inflation – the Fed’s preferred inflation gauge – will be released soon and will be closely watched for signs of easing inflationary pressures.
If the data shows that inflation remains high, the Fed may not be as aggressive in its next rate cut, which could dampen the current bullish momentum. Moreover, Fed Chairman Jerome Powell’s upcoming speech will be crucial in signaling the central bank’s future policy direction.