Gold Price Forecast: Stronger Dollar and Fed Policy Expectations Pressure Gold at $2,497

Gold prices (XAU/USD) have continued their descent, trading around $2,497.91 and reaching an intraday low of $2,490.12.

The ongoing decline is largely attributed to a stronger U.S. dollar, which gained momentum as traders adjusted their expectations regarding potential policy easing by the Federal Reserve.

If You Took a Sell From $2,5600 On Gold, Better Hold Your Position/s Cos Gold Is Fuelling To The Bottom. First Target Is At $2,480.00 And Second Target Is At $2,440.00🎯
Let’s See How It Pushes Down To That Level.📊🫶🏾💰 pic.twitter.com/0gpKHZ8WPW

— N D A B E Z I T H A. (@Mike84054545) September 2, 2024

This change in outlook followed the release of the U.S. July Personal Consumption Expenditures (PCE) Index, which signalled that the Fed might not be as aggressive in cutting interest rates as previously anticipated.

Stronger Dollar and Fed Rate Cut Speculations Pressure Gold Prices

The U.S. dollar’s recent strength has played a crucial role in the downward pressure on gold prices. On Monday, the broad-based dollar reached a two-week high, supported by reduced market expectations for aggressive rate cuts by the Federal Reserve.

Markets are now pricing in a 70% probability of a 25 basis point (bps) rate cut by the Fed in September, down from earlier predictions of a larger 50 bps cut. The July U.S. PCE Price Index, a key inflation gauge closely watched by the Fed, rose by 2.5% year-over-year.

#Gold prices traded in a narrow range on Monday as investors looked to US jobs data to firm their bets on the size of @federalreserve 's interest rate cut expected this month. October gold futures inched up to $2,505/ounce.

— Neha Anand (@Neha_1007) September 2, 2024

While this matched the previous month’s increase, it was slightly below market expectations of 2.6%. The core PCE, which excludes volatile food and energy prices, increased by 2.6% year-over-year, also missing the anticipated 2.7% rise.

These figures have led to a recalibration of market expectations, reducing the likelihood of aggressive monetary easing and thus strengthening the dollar.

A stronger dollar generally exerts downward pressure on gold prices because it makes the precious metal more expensive for holders of other currencies. As a result, investor demand for gold tends to decrease, leading to lower prices.

Given the current environment, the dollar’s strength combined with lower-than-expected inflation data has further diminished gold’s appeal as a safe-haven asset.

Geopolitical Tensions Increase Safe-Haven Appeal for Gold

While the strong dollar has weighed heavily on gold, ongoing geopolitical tensions are adding a layer of complexity to the market dynamics.

In Israel, a general strike has been called by the Histadrut Labour Federation, urging the government to negotiate with Hamas for the release of hostages held in Gaza. This move follows the recovery of six hostages’ bodies, which has sparked widespread protests and mourning across the nation.

Hamas has claimed that Israeli airstrikes have killed some of the hostages, further escalating tensions in the region.Additionally, Yemen’s Houthi rebels have attacked a Panama-flagged oil tanker in the Red Sea. Although no casualties were reported, this incident has added to the geopolitical uncertainty.

2/3 Geopolitical tensions, rising violence in the Middle East, and US-China trade issues are pushing #gold prices higher. In #BRICS, #China #Russia & now #Brazil are seeing the #investment #climate worsen. #GoldInvesting #USChinaTrade #Geopolitics

— Aniruddha Naha (@nahaani) September 2, 2024

The United Nations has also reported that 87,000 children in Gaza have received their first dose of the polio vaccine, but ongoing airstrikes and violence continue to hamper relief efforts.

These geopolitical tensions are likely to drive investors towards gold as a safe-haven asset, despite the stronger dollar.

Historically, gold has been viewed as a stable store of value during times of geopolitical instability, and this trend could continue if the situation in the Middle East deteriorates further.

China’s Economic Slowdown Adds Further Pressure

Another significant factor weighing on gold prices is the economic slowdown in China, the world’s largest consumer of gold. In August, China’s Manufacturing Purchasing Managers’ Index (PMI) dropped to 49.1, down from 49.5 in July and below the expected 49.5.

A PMI below 50 indicates a contraction in the manufacturing sector, signaling weaker economic activity and, by extension, reduced demand for industrial metals, including gold.

“Chinese factory activity contracted 4th straight month in Aug w/sub indexes showing deepening deflationary pressures…latest sales figures showed residential slump deepened as expectations of a further drop in new-home prices hampered efforts to cushion the downturn”@business pic.twitter.com/XinHXmw9b1

— Danielle DiMartino Booth (@DiMartinoBooth) September 1, 2024

China’s economic performance is closely watched by global markets, and a slowdown in its manufacturing sector is seen as a negative indicator for future gold demand.

Weaker economic conditions in China can lead to reduced consumer spending on luxury goods, including gold, further exacerbating the downward pressure on prices.

Gold Price Forecast

As it stands, Gold (XAU/USD) is trading at $2,497.50, reflecting a decline of 0.30% as it remains under pressure from a strengthening U.S. dollar and concerns over China’s economic health.

The 4-hour chart shows that Gold is trading just below a critical pivot point at $2,504.66, which will be a key level to watch in the coming days.

Should Gold break above this pivot, it could test immediate resistance at $2,514.84, with further targets at $2,529.23 and $2,540.41.

However, the technical indicators currently suggest a bearish bias. The Relative Strength Index (RSI) stands at 40, indicating that momentum is tilted towards the downside but is not yet in oversold territory.

Gold is also trading below its 50-day Exponential Moving Average (EMA) at $2,512.02, reinforcing the bearish outlook. Immediate support is located at $2,491.71, with further levels at $2,480.08 and $2,471.29.

Given this technical setup, traders may consider short positions below the pivot point at $2,504.66, targeting the $2,487.00 level. Conversely, a break above $2,505 could invalidate this bearish view, opening the door for a potential rally toward higher resistance levels.