Gold (XAU) Price Forecast: Could ECB and Fed Rate Cuts Propel Gold Higher?

Gold Prices Rise on Federal Reserve Rate Cut Expectations

Gold prices advanced on Thursday, buoyed by market anticipation of a rate cut at the upcoming U.S. Federal Reserve meeting. Traders expect the Fed to deliver a 25-basis-point reduction, given that U.S. consumer prices showed only a marginal increase in August. However, core inflation remains sticky, which may limit the size of the cut.

At 11:15 GMT, XAU/USD is trading $2326.72, down $1.09 or -0.05%.

Analysts, such as Carsten Menke from Julius Baer, believe that the prospect of moderately lower U.S. interest rates will likely support gold prices in the near term. “Gold’s reaction to inflation data suggests that expectations for lower rates are enough to keep prices around $2,500 per ounce in the short term,” Menke said.

U.S. Inflation and Treasury Yields Factor Into Gold’s Movement

Inflation data from the U.S. Consumer Price Index (CPI) report for August confirmed a 0.2% monthly increase, which was in line with market forecasts. However, core inflation, excluding volatile items like food and energy, ticked up by 0.3%, exceeding the expected 0.2%. This raised concerns that inflationary pressures might persist longer than anticipated, influencing gold’s outlook.

U.S. Treasury yields also climbed slightly on Thursday, as traders weighed the inflation data and upcoming rate decisions. The yield on the 10-year Treasury was up by over 2 basis points to 3.678%, while the 2-year Treasury yield rose to 3.672%. These higher yields could limit gold’s upside, as rising bond yields often compete with gold as a safe-haven investment.

Market Awaits Further Data to Guide Expectations

Further clarity on the Fed’s rate path will likely come from additional U.S. economic data expected this week. Traders are looking toward the U.S. Producer Price Index (PPI) report, initial jobless claims data, and consumer sentiment reports for more signals on inflation and economic conditions. The PPI, which measures wholesale inflation, is expected to show a 0.2% increase for August.

Additionally, markets remain split on whether the Fed will opt for a larger 50-basis-point cut or stick with the anticipated 25-basis-point move. While a deeper cut could stimulate gold prices, it might also pose risks to the broader economy.

Eurozone Interest Rates Also Play a Role

The European Central Bank (ECB) is set to announce its own 25-basis-point rate cut, which would mark its second reduction this year. This decision could influence gold prices indirectly through its impact on the Euro and U.S. Dollar exchange rates. A weaker Euro, driven by easing in the Eurozone, could strengthen the U.S. Dollar, applying downward pressure on gold prices.

Gold Prices Forecast

Gold is likely to hold steady around the $2,500 level in the short term, especially if the Fed proceeds with a 25-basis-point rate cut. However, inflation concerns and rising Treasury yields could limit significant gains.

Should inflation data remain elevated, the outlook for gold may become bearish, as persistent inflation would increase the likelihood of the Fed keeping rates higher for longer. Conversely, signs of a slowdown in inflation could strengthen the case for gold, as it thrives in lower interest rate environments.

Traders should closely monitor upcoming U.S. economic releases for further insights into gold’s next move.