Gold climbs above $3,650 amid dovish Fed expectations, bearish USD

• Gold regains positive traction on Friday as Fed rate cut bets continue to weigh on the USD.
• Rising geopolitical tensions and trade-related uncertainties further benefit the commodity.
• Even the upbeat market mood does little to dent demand for the safe-haven precious metal.

Gold (XAU/USD) is seen building on the previous day's goodish rebound from the $3,613-3,612 area and gaining some follow-through positive traction during the Asian session on Friday. The commodity climbs above the $3,650 level in the last hour and remains well within striking distance of the record high touched earlier this week amid a supportive fundamental backdrop. Softer labor market data overshadowed a higher-than-expected US consumer inflation reading on Thursday and lifted bets for a more aggressive policy easing by the Federal Reserve (Fed). This, in turn, drags the US Dollar (USD) to its lowest level since July 24 and continues to benefit the non-yielding yellow metal.

Apart from this, political turmoil in France and Japan, along with persistent trade-related uncertainties and rising geopolitical tensions, turn out to be other factors acting as a tailwind for the safe-haven Gold. Bulls, meanwhile, seem rather unaffected by the prevalent risk-on mood, which tends to undermine the precious metal. This, in turn, suggests that the path of least resistance for the XAU/USD pair is to the upside, though overbought conditions warrant some caution before positioning for further gains. Nevertheless, the commodity remains on track to register strong gains for the fourth successive week and seems poised to prolong its recent well-established upward trajectory.

Daily Digest Market Movers: Gold retains bullish bias amid a combination of factors

• The US Bureau of Labor Statistics (BLS) reported that the headline Consumer Price Index (CPI rose by a seasonally adjusted 0.4% in August, pushing the annual inflation rate to 2.9% from 2.7% recorded in July. Meanwhile, the core gauge, which excludes volatile food and energy prices, climbed 0.3% for the month and 3.1% on a yearly basis in August, matching the previous month's print and consensus estimate.
• The higher-than-expected US consumer inflation reading, however, was overshadowed by a rise in the US Weekly Initial Jobless Claims to the highest level since October 2021. This comes on top of a weak US Nonfarm Payrolls report last Friday and provides further evidence about the softening labor market, which, in turn, backs the case for a more aggressive policy easing by the Federal Reserve and underpins the Gold.
• The markets have now almost fully priced in three rate cuts for the rest of the year. According to the CME Group’s FedWatch Tool, traders see a 100% chance of a 25-basis-point rate cut at the FOMC meeting next week and expect two more rate cuts, in October and in December. This dragged the yield on the benchmark 10-year US government bond to a five-month low and the US Dollar to its lowest level since July 24.
• The British daily Financial Times reported that the Donald Trump administration in the US will pressure G7 countries to hit India and China with sharply higher tariffs for buying Russian oil in an attempt to force Moscow into peace talks with Ukraine. Moreover, Japan’s Trade Ministry announced on Friday that the country will impose additional export restrictions on several foreign entities as part of sanctions against Russia.
• Poland has intercepted Russian drones that were flying over its airspace after completing a mission in western Ukraine. This was the first time a NATO member nation has fired shots in Russia’s war on Ukraine, raising the risk of a further escalation of geopolitical tensions. Apart from this, the ongoing conflicts in the Middle East contribute to driving flows towards the safe-haven bullion and back the case for further gains.
• Traders now look to the release of the Preliminary University of Michigan US Consumer Sentiment and Inflation Expectations. The data might influence the USD price dynamics and produce short-term trading opportunities around the XAU/USD pair heading into the weekend. Nevertheless, the aforementioned fundamental backdrop suggests that the path of least resistance for the precious metal remains to the upside.

Gold technical setup warrants some caution before positioning for any further appreciation

The daily Relative Strength Index (RSI) remains in overbought territory and warrants some caution for the XAU/USD bulls, or positioning for any further appreciating move. That said, some follow-through buying beyond the $3,657-3,658 region should allow the Gold price to retest the all-time peak, around the $3,675 zone touched on Tuesday. The momentum could extend further and allow the commodity to conquer the $3,700 round-figure mark.

On the flip side, the Asian session low, around the $3,630 area, now seems to act as an immediate support ahead of the overnight swing low, around the $3,613-3,612 region and the $3,600 round figure. This is followed by the weekly low, around the $3,580 region, below which the Gold price could extend the corrective slide towards the $3,565-3,560 intermediate support en route to last Thursday's swing low, around the $3,510 region.

Fed FAQs

What does the Federal Reserve do, how does it impact the US Dollar?

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

How often does the Fed hold monetary policy meetings?

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

What is Quantitative Easing (QE) and how does it impact USD?

In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

What is Quantitative Tightening (QT) and how does it impact the US Dollar?

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.