Gold prices (XAU/USD) continue to decline near the psychological level of $2500 on Monday.
The rise of the US dollar following the US Personal Consumption Expenditures (PCE) index for July has impacted the precious metal.
Additionally, concerns about an economic slowdown in China, the world’s largest gold buyer, are contributing to the drop in gold prices.
However, I believe that the growing expectations of an interest rate cut by the US Federal Reserve in its September meeting could help limit gold’s losses, as lower interest rates reduce the opportunity cost of holding non-yielding gold.
Looking ahead, the US Manufacturing Purchasing Managers’ Index (PMI) for August is set to be released tomorrow, Tuesday, while the Services PMI will be released on Thursday. Attention will then turn to US employment data on Friday, including non-farm payrolls, the unemployment rate, and average hourly earnings for August.
From a geopolitical perspective, protests have erupted across Israel after the Israeli military retrieved the bodies of six hostages it claimed were killed by Hamas in Gaza. Israel’s largest labour union has called for a strike, stating that “the entire Israeli economy will come to a halt” on Monday. In my opinion, this could negatively impact the positive momentum in ceasefire negotiations in Gaza and potentially exert downward pressure on gold prices in the near to medium term.
The Chinese Manufacturing PMI fell to 49.1 in August from 49.54 in July, which is below the market expectation of 49.5. The Non-Manufacturing PMI rose to 50.3 in August from 50.2 previously, surpassing the estimate of 50.0, which may lead to mixed expectations for the recovery of the Chinese economy and result in gold price fluctuations, supporting the continuation of the current sideways trend.
Additionally, data released by the US Bureau of Economic Analysis on Friday showed that the Personal Consumption Expenditures (PCE) price index increased by 2.5% year-on-year in July, compared to the previous reading of 2.5%, falling short of the market expectation of 2.6%. This supports the theory of a robust US economy and weakens rate cut expectations, thereby strengthening the dollar due to higher bond yields in the near term, which will put downward pressure on gold prices.
Markets currently estimate a 67% chance of a 25 basis point rate cut by the Federal Reserve at its monetary policy meeting on September 17-18, and a 33% chance of a 50 basis point cut, which keeps downward pressures on gold prices from a fundamental perspective, especially with the US dollar continuing its current fluctuations around 101.70.
Today marks Labor Day in the US, and thus, weak liquidity may support the downward momentum in gold prices, as traders reposition their holdings ahead of high-impact US economic data later this week, including the ISM Manufacturing PMI, ADP employment change, and non-farm payrolls on Thursday and Friday, which will significantly impact price volatility.
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