Gold (XAU/USD) shines bright as traders hope for rate cuts in June

Gold continues to build bullish momentum towards the December highs despite the pullback on Tuesday evening. The precious metal has been taking advantage of the weaker dollar and falling yields. Recent data has shown a weakening manufacturing industry in the US, coupled with falling inflation and higher jobless claims. This has allowed markets to increase their expectations that the Federal Reserve will start cutting in June – currently at 56% - which has been weighing on treasury yields and the dollar.

The technical setup was already showing an increased appetite to buy gold since mid-February, but it wasn’t until the weaker data that buyers were convinced to come back in. Thursday's higher jobless claims and in-line PCE reading strengthened the bullish appetite, but it wasn’t until Friday’s weaker-than-expected ISM manufacturing PMIs that the rally took off. Tuesday’s 3.6% drop in manufacturing orders in January cemented the desire to move higher. 

The Federal Reserve continues to be data-driven and is worried about premature rate cuts, but markets are still hoping for cuts to start in June. March is a busy month on the macro calendar, with many central bank meetings and economic data. Thursday will see the ECB take centre stage, and whilst there is no hope for a rate cut at this meeting, markets are hoping Lagarde and her team may give further guidance on when cuts could start now that inflation in the Eurozone is falling once again. If so, general market sentiment could be affected, potentially supporting gold further. On Friday the latest jobs data in the US will be released. There isn’t much change expected but an uptick in the unemployment rate or a drop in wages could also strengthen the appetite for gold as it would give the impression that the tightness in the US labour market is starting to unwind. US CPI would be the next important event on the calendar on Tuesday next week. Again, further softening in inflation could likely cement the bullish rally in gold even further.

Technically, the recent moves have sent XAU/USD into overbought territory, but there doesn’t seem to be an immediate threat to the sustainability of the bullish move. That said, buyers may struggle over the coming days with resistance at the previous high (2,145) which could see some pullbacks, but they are likely to be limited and used for new buyers to come in and add more impulsion to the rally. If the fundamentals continue to support gold – as mentioned above – then the path of least resistance in XAU/USD is expected to be higher over the coming weeks as traders get more clarity on the appetite to hold gold in portfolios.

XAU/USD daily chart

Past performance is not a reliable indicator of future results.