Gold prices (XAU/USD) rebounded above $2,440 on Monday after dipping near $2,410 during the European session. The precious metal faced initial selling pressure due to profit-taking as it aimed to surpass its all-time highs above $2,480. However, the overall outlook for gold remains positive, supported by recent developments in US bond yields and the US Dollar.
The 10-year US Treasury yields fell to 3.67%, reaching fresh annual lows as speculation mounts over a potential rate cut by the Federal Reserve (Fed) in September. Lower yields on interest-bearing assets diminish the opportunity cost of holding non-yielding assets like gold. Concurrently, the US Dollar Index (DXY), which measures the Greenback against six major currencies, dropped to its lowest level since March, nearing 102.60.
According to the CME FedWatch tool, traders are increasingly pricing in a 50-basis point cut in interest rates by the Fed in September. Furthermore, expectations suggest that the Fed may lower its key borrowing rates by over 100 basis points this year.
These market expectations for more substantial rate cuts have been driven by a series of weak US economic data, which has raised concerns about the Fed’s ability to achieve a ‘soft landing’—a scenario where inflation is controlled without triggering a recession. Key factors contributing to these expectations include deteriorating labor market conditions and a slowdown in the manufacturing sector.
The July Nonfarm Payrolls (NFP) report revealed a significant slowdown in labor demand, with payrolls rising by only 114,000 compared to the expected 175,000 and June’s revised 179,000. Additionally, the Unemployment Rate unexpectedly increased to 4.3%, its highest level since November 2021. The ISM Manufacturing Purchasing Managers Index (PMI) also indicated a sharper contraction, falling to 46.8 in July.
As a result, gold prices are benefitting from the lower opportunity cost of holding the precious metal, with continued support from weakening bond yields and a softer US Dollar.
