Gold Prices Forecast: Cooling Labor Market Boosts Case for Fed Rate Cuts

Gold Prices Surge on Dovish Fed Expectations

Gold prices hit a two-week high on Thursday as U.S. bond yields gave back earlier gains, bolstered by signs of a cooling labor market. This development strengthens the case for a potential interest rate cut by the Federal Reserve in September, with investors now closely watching the upcoming U.S. non-farm payrolls data for further indications.

At 10:41 GMT, XAU/USD is trading $2360.56, up $5.280 or +0.22%.

Gold’s Performance and Market Expectations

Gold’s recent strength is attributed to growing expectations of an economic slowdown in the U.S. and a dovish stance from the Federal Reserve. Despite not anticipating another major rally similar to the first part of the year, the fact that gold remains above $2,300 is significant. Benchmark 10-year U.S. Treasury yields have dropped to their lowest in two months, following data indicating a softening labor market, which further supports gold prices.

Upcoming Non-Farm Payrolls Data

Traders are now awaiting the non-farm payrolls data set to be released on Friday, seeking additional clues on the labor market’s health and potential Fed actions. According to a Reuters poll, most forecasters predict the Fed will cut its key interest rate in September and once more this year, though there remains a risk of only one or no cuts.

Fed’s Rate Cut Projections

The majority of economists have consistently predicted two rate cuts this year, despite market fluctuations. Recent data showed slower U.S. economic growth last quarter, with inflation measures remaining high. This has led some Fed officials to signal no rush in cutting rates, while the Fed’s latest “dot plot” projection might show fewer cuts than previously expected.

Inflation and Rate Cut Outlook

Persistent inflation and low unemployment complicate the case for an early rate cut. Measures like the PCE price index, which the Fed targets, are not expected to hit the 2% goal until at least 2026. Economists forecast the unemployment rate to stay around the current 3.9% until 2027, indicating continued tightness in the labor market. The U.S. economy’s projected growth of 2.4% this year also suggests that significant rate cuts might be less likely.

Market Forecast: Bullish

Given the current economic indicators and the Fed’s anticipated dovish stance, the outlook for gold remains bullish in the short term. Lower interest rates decrease the opportunity cost of holding non-yielding bullion, which should continue to support gold prices. However, any resurgence in U.S. inflation could pressure gold, making the upcoming data releases crucial for market direction.

Technical Analysis

Despite the recent sell-off, which put pressure on short-term trend indicators, XAU/USD proved its resilence with a successful test of the 50-day moving average at $2340.81. This intermediate trend indicator is the nearest support.

A sustained break under the 50-day MA could trigger an acceleration into the swing bottom at $2277.34.

On the upside, given the short-term range of $2450.13 to $2354.61, traders should look for a near-term test of its pivot at $2402.37, should current momentum persist. This is the last resistance before the record high at $2450.13.