Gold continues to rally as investors foresee lower interest rates on the horizon
NEW YORK (July 5) Gold (XAU/USD) rises on Friday, continuing its run of positive days as investors become increasingly optimistic the Federal Reserve (Fed) will lower interest rates sooner than previously thought, and the US Dollar (USD) softens, adding a lift to Gold which is predominantly bought and sold in Dollars.
Gold rallies as interest rates expected to fall, USD weakens
Gold trades in the $2,360s on Friday, up by more than a third of a percent on the day, as bets increase that the Fed will begin cutting interest rates as soon as its meeting in September.
A string of sub-par data releases from the US has dented confidence in the economy and increased speculation the Fed will move to lower interest rates in an attempt to spur growth. Weak labor market and services sector data has particularly impacted expectations. In light of this, Friday’s key labor report, the Nonfarm Payrolls release, is being touted as a significant data point in shaping expectations.
The probability of the Fed cutting its principal policy rate, the Fed Funds rate, by 0.25% by September has increased from the mid-60s at the start of the week to 72% on Friday, according to the CME FedWatch tool, which uses the price of the 30-day Fed Funds futures in its calculations. The promise of lower interest rates, in turn, increases Gold’s attractiveness as an investment because it lowers the opportunity cost of holding a non-interest-paying asset.
Gold gets a further backwind from a weaker US Dollar, which is falling because the expectation of lower US interest reduces foreign capital inflows, as well as because of a strengthening of its major counterparts. The Pound Sterling (GBP) is edging higher on Friday after a Labour Party landslide victory in the July 4 general election brings the promise of growth and stability. The Euro (EUR) is recovering on reduced political risk as it becomes increasingly clear the French far-right National Rally party will now probably not achieve a majority in the second round of elections on Sunday.
Gold gains on broader global backdrop
Gold is probably also benefiting from generalized demand as a result of broader geopolitical and macro factors.
The ongoing conflicts in the Middle East and Ukraine, as well as the increased risk of a Trump presidency, are still factors driving nervous investors to store their wealth in Gold.
The expansion of the BRICS trading bloc and its expressed aim to de-dollarize global trade has also increased demand for Gold, which is viewed as the most realistic replacement for countries denied access to Dollar-denominated markets because of sanctions.
Set against this, however, is falling political risk in Europe, which, despite a notable swing to the far right, is likely to remain in the hands of moderate coalitions.
High central bank demand, which accounts for roughly a quarter of the Gold market, might also be easing. Much buying was driven by Asian central banks using Gold as a hedge to support their domestic currencies as they depreciated against the US Dollar when it rallied in the spring, after the Fed had to revise its expectations for policy normalization.
FXStreet
