Gold prices (XAU/USD) softened to around $2,500 during early Asian trading on Monday, pressured by a stronger U.S. dollar. However, the downside for gold may be limited as market participants anticipate a potential interest rate cut by the U.S. Federal Reserve in September.
Recent data from the Commerce Department showed that the U.S. Personal Consumption Expenditures (PCE) Price Index rose 0.2% month-over-month in July, in line with expectations. Year-over-year, the PCE inflation rate held steady at 2.5%. The core PCE, which excludes volatile food and energy prices, increased by 0.2% for the month and 2.6% year-over-year, slightly below the expected 2.7%.
Alex Ebkarian, Chief Operating Officer at Allegiance Gold, noted that the PCE report suggests inflation is no longer the primary concern for the Fed, which is now focusing more on unemployment data. This shift supports the likelihood of a rate cut in September.
Following the PCE inflation report, traders have increased their expectations for a 25 basis points (bps) rate cut by the Fed to approximately 70%, with a 30% chance of a 50 bps reduction, according to the CME FedWatch Tool. Anticipation of lower interest rates could support gold prices in the near term by reducing the opportunity cost of holding the non-yielding metal.
In geopolitical news, Israel’s largest labor group is planning a nationwide strike on Monday, pushing for a Gaza cease-fire and the release of hostages held by Hamas, as reported by Bloomberg. Investors will monitor developments in the Middle East closely, as rising tensions could increase safe-haven demand for gold.
Nonetheless, concerns about physical gold demand and a sluggish Chinese economy may limit gold’s upside. China, the world’s largest gold buyer, faces economic challenges. The Chinese Caixin Manufacturing PMI for August, set to be released on Monday, is expected to improve to 50.0 from 49.8 previously. A weaker-than-expected result could exert downward pressure on gold prices.
