Gold Benefits from Weaker USD Ahead of PCE Data

Gold is benefiting from a weaker US Dollar, edging up by 0.45% amidst firm US Treasury bond yields. Investors are closely watching the upcoming PCE The Federal Reserve’s favoured inflation indicator, the PCE Price Index, is expected soon, and investors are eagerly monitoring it since it may affect expectations for a rate cut. The CME FedWatch Tool now predicts a 66% chance of a rate cut in September, up from 59.5%, which has caused the US Dollar Index (DXY) to decline.

Due to the declining US dollar last Friday, gold recovered from its low and proceeded to rise on Monday. Investors are waiting for the release of the Fed’s inflation gauge, the Personal Consumption Expenditures (PCE) Price Index. As the US Treasury bond yields rise and the Greenback declines, the XAU/USD exchange rate is currently trading at $2,331.

Investors seeking safety are turning to gold as risk appetite deteriorates. US Treasury bond yields remain flat, with the 10-year Treasury note standing at an unchanged 4.253%. The US Dollar Index (DXY), which tracks the value of the American currency against a basket of six other currencies, has declined by 0.26% to 105.53.

The US economic agenda will prominently feature the PCE, and if the data aligns with consensus expectations, it may signal an evolving disinflation process. This could increase the likelihood of an interest rate cut as early as September.

According to the CME FedWatch Tool, traders are pricing in a 66% chance of easing in September, up from 59.5%. Meanwhile, the labor market is approaching an inflection point, where further weakening could lead to higher unemployment, as indicated by recent statements from a key Fed official. This dovish rhetoric suggests that inflation is not the sole risk faced by Fed policymakers.

Looking ahead, the December 2024 federal funds rate futures contract implies that the Fed will ease policy by just 36 basis points (bps) by year-end. Headline PCE is expected to reach 0% in May, lower than April’s 0.3%, and the twelve-month figure is projected to decline from 2.7% to 2.6%. Core PCE is anticipated to be 0.1% MoM (down from 0.2%) and 2.6% annually (down from 2.8%).

Recent US economic data has been mixed. While the economy remains robust based on strong S&P Global Flash PMIs and a slowdown in Retail Sales, weakness persists in the labor market.

Fed officials continue to emphasize data dependency in their decisions regarding interest rate cuts. Despite a positive CPI report last week, policymakers are cautious and want to see additional data, similar to May’s, before considering any changes.

Technical Outlook:

The price of gold is rising and is currently testing the $2,330 head-and-shoulders neckline. Nevertheless, following the formation of a “bearish-engulfing” chart pattern last Friday, the overall bias is still negative. This supports the Head-and-Shoulders pattern even more and points to more decline for the unyielding metal.

$2,300 per ounce would be the next support level for XAU/USD. If that level is broken, it may drop further to $2,277, the low from May 3, and then to $2,222, the high from March 21. Deeper losses might aim for the $2,170–$2,160 Head-and-Shoulders pattern target.
On the upside, if gold reclaims $2,350, it would expose additional key resistance levels, including the June 7 cycle high of $2,387, with potential challenges toward the $2,400 mark.