Gold Price Forecast XAU/USD – Bets on Less-Aggressive Fed Spur Demand Optimism

Gold futures are edging higher on Monday, hovering just below an eight-month high reached earlier in the session. The move is being supported by lower U.S. Treasury yields and a weaker U.S. Dollar. Both are being pressured by investors betting on a less-aggressive rate-hike trajectory from the U.S. Federal Reserve the rest of the year.

At 07:50 GMT, February Comex gold is trading $1878.90, up $9.20 or +0.49%. On Friday, SPDR Gold Shares ETF (GLD) settled at $173.70, up $3.18 or +1.86%.

Gold Surges as Treasury Yields, US Dollar Tumble

Treasury yields plunged on Friday as investors digested economic data and assessed its implication for the Federal Reserve’s hiking cycle.

Nonfarm payrolls increased by 223,000 for the month of December, above the Dow Jones estimate for 200,000, while the unemployment rate fell to 3.5%, 0.2 percentage points below the expectation.

Additionally, wage growth was less than expected in an indication that inflation pressures could be weakening. Average hourly earnings rose 0.3% for the month and increased 4.6% from a year ago. The respective estimates were for growth of 0.4% and 5%.

Bond yields fell further when Friday’s ISM’s non-manufacturing Purchasing Managers’ Index showed that production numbers fell, a sign that the Fed’s rate hikes may be working to slow the economy.

The drop in Treasury yields also made the U.S. Dollar a less-attractive investment. A weaker greenback tends to drive up foreign demand for dollar-denominated bullion.

Fed Speakers Say Central Bank Can Slow Rate Hike Pace

Atlanta Federal Reserve President Raphael Bostic said on Friday that the latest U.S. jobs data was another sign that the economy is gradually slowing and should that continue the Fed can step down to a quarter percentage point interest rate hike at its next policy meeting.

Richmond Fed President Thomas Barkin also said the U.S. central bank’s move to smaller interest rate hike increments would help limit damage to the economy.

Short-Term Outlook

Gold futures are getting a lift on Monday as Fed funds futures traders increased bets the Fed will hike rates by 25 basis points at the conclusion of its two-day meeting on Feb. 1 after Friday’s data.

A 25-basis point increase is now seen as a 73% probability, compared with 54% before the jobs report, with a 50-basis point hike now seen as a 27% probability.

Traders could turn a little cautious after today with Fed Chair Powell expected to give a speech on Tuesday, but more importantly, on Thursday, the U.S. will release its latest data on consumer price inflation.

The report is expected to show that headline prices were unchanged in December while core prices increased 0.3%. A softer-than-expected reading could spike gold prices higher.