Gold prices climbed on Wednesday in response to a lower-than-expected inflation report from the United States, boosting expectations of a Federal Reserve interest rate cut later in the year. Despite this, the Federal Reserve’s cautious stance and Chairman Jerome Powell’s reluctance to specify a timeline for rate cuts strengthened the US Dollar. XAU/USD traded at $2,318, marking a 0.13% gain.
Fed Chair Jerome Powell noted on Wednesday that the Fed is less certain about inflation than previously anticipated “to cut.” He emphasized readiness to respond if job market conditions unexpectedly weaken. Regarding the day’s US inflation report, Powell highlighted that it represents just one dataset and underscored the importance of observing inflation trends aligning with the Fed’s objectives.
In their monetary policy statement, the Federal Open Market Committee (FOMC) indicated that they do not anticipate reducing the target range until they gain greater confidence in sustainable inflation moving towards 2 percent. They affirmed readiness to adjust monetary policy as needed to address emerging risks hindering the Committee’s objectives.
Additionally, the ‘dot-plot’ revealed that the median projection of Fed officials for the federal funds rate was revised upward from 4.6% to 5.1% by the end of 2024, indicating expectations for a single rate cut from the current effective rate of 5.33%.
In the Summary of Economic Projections (SEP), Fed officials maintained the economic growth forecast at 2.1% for 2024, unchanged from March. The Unemployment Rate projection remains at 4%, while PCE inflation is expected to rise from 2.4% to 2.6%, and Core PCE from 2.6% to 2.8%.
Earlier, the US Bureau of Labor Statistics reported that May’s inflation remained unchanged compared to April’s data, which supported gold prices as US Treasury bond yields declined. The US Dollar Index (DXY), which measures the dollar against a basket of currencies, fell to a three-day low.
The US 10-year Treasury note yield decreased by eight basis points to 4.324%, providing tailwinds for gold. Consequently, the DXY decreased by 0.51% to 104.71.
According to the CME FedWatch Tool, the latest US inflation report increased the probability of a Fed rate cut in September from 46.7% to 61.3%.
