The US dollar index fell 0.4%, lending support to gold by making it more attractive to holders of other currencies. This followed a sharp drop in gold prices earlier this week, driven by a decline in safe haven demand after geopolitical tensions eased.
Market participants are increasingly pricing in the possibility of a Federal Reserve rate cut in December, with the odds now at 66.5%, up from 55.7% earlier this week, according to CME Group’s FedWatch tool. Han Tan, chief market analyst at Exinity Group, noted: “The moderating US dollar is helping gold continue its mild recovery after steep declines at the start of the week.”
Impact of PCE data on gold prices
The core Personal Consumption Expenditures (PCE) index, a favorite inflation gauge for the Federal Reserve, is critical in shaping expectations for monetary policy. Warmer-than-expected PCE data would likely strengthen the dollar and weaken gold, as this could reduce the likelihood of near-term rate cuts and signal that inflation remains elevated. Higher interest rates increase the opportunity cost of holding non-yielding assets like gold, making the metal less attractive.
Conversely, colder than expected PCE data could strengthen the case for rate cuts, pushing the dollar lower and supporting gold prices. A weaker dollar generally increases gold’s appeal to international buyers, while the prospect of lower interest rates makes the precious metal more competitive against yield-bearing assets. This factor could push gold above its resistance at $2663.51, opening the path to $2693.40.
Physical demand increase
The recent decline in the price of gold has attracted physical buyers. Many had stayed out of the market during the metal’s earlier rally and are now stepping in to take advantage of the lower levels. This increased physical demand provides some underlying support for prices as traders await further economic signals.
Market forecast
With gold currently trading around $2,654, the near-term direction of the market will likely depend on US economic data. A move above $2663.51 could pave the way for further gains towards $2693.40, while a decline below $2629.13 could see prices return to $2607.35 or lower. Traders should prepare for volatility as key metrics of PCE inflation, GDP and unemployment benefits drive expectations for Federal Reserve policy.