Gold outlook: focus on rate cut odds as sentiment improves

Gold (XAU/USD) is back trading with an upside bias after a few days of sideways consolidation following a downside correction earlier this month. Markets had been drifting without a clear direction last week as uncertainty about the Fed’s policy outlook caused risk appetite to dwindle. This week, the push higher in gold is largely being driven by renewed expectations that Fed could cut interest rates again in December, a shift fuelled by disappointing U.S. economic data and dovish comments from Fed officials.

The latest pricing on the CME FedWatch tool shows that the odds of another cut are now at 85%, having risen sharply from under 20% just a week ago. Several factors have triggered this move, but the latest driver seems to be the increase in odds that Kevin Hassett, chairman of the president’s National Economic Council, will get elected by Trump as the new Fed Chairman next year. His dovish growth focus is thought to be the one that most aligns with Trump’s views that that rates can fall much further, making him the perfect candidate. If he was elected, a faster easing cycle would be priced in.

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However, that is still months away. Markets are more concerned with what will happen in the next few weeks. A barrage of data released on Tuesday – albeit most of it delayed and therefore somewhat stale – confirmed the view that the US economy is softening. Retail sales, producer prices and consumer confidence all came in below expectations. The data isn’t awful, but soft enough to enable the Federal Reserve to consider easing rates further, even if just as a precautionary measure in case the labour market has deteriorated further in the past few months.

As a result, real yields on U.S. bonds have softened alongside a weakening dollar, both of which tend to boost gold’s appeal for investors. Beyond the interest-rate dynamic, structural factors continue to underpin demand: central banks remain major purchasers of gold for reserve diversification, and many investors still view gold as a safe haven amid global economic uncertainty and macro-financial risks.

Gold is likely to remain well-supported in the coming days as markets continue to price in the possibility of a near-term Federal Reserve rate cut, keeping U.S. real yields subdued and the dollar on the back foot. However, several key risks could temper the rally. The most immediate threat is any upside surprise in upcoming U.S. economic data, which could revive the case for “higher for longer” rates and push yields higher again, removing one of gold’s main supports. A rebound in the dollar could also weigh on the metal by making it more expensive for international buyers. Finally, from a technical standpoint, gold may be vulnerable to short-term pullbacks or consolidation after its recent climb, particularly if traders lock in profits or positioning becomes overstretched. Overall, the balance of drivers favours ongoing strength, but the path higher is not without near-term risks.

Gold (XAU/USD) daily chart

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