Gold retreats as Dollar strengthens, despite strong Fed rate cut expectations

• XAU/USD declines as investors take profits before NFP release, despite high probability of Fed easing this month.
• US economic data shows mixed signals: Jobless Claims increase and trade deficit expands, while Services PMI reaches six-month high.
• Geopolitical uncertainties and regulatory concerns maintain safe-haven appeal for Gold.

The price of Gold edges downward during Thursday's North American trading session, as the US Dollar regains some strength. This occurs despite recent economic data fueling speculation about a potential Federal Reserve interest rate reduction at the upcoming September meeting. XAU/USD is currently trading at $3,542, down 0.48%.

Precious metal dips 0.48% as traders digest mixed US economic indicators

The latest US economic reports reveal continued weakness in the labor market, with Initial Jobless Claims for the previous week showing an increase. Additional data indicated a widening trade deficit in July, while the Institute for Supply Management (ISM) Services PMI expanded at its fastest rate in six months.

Despite the mixed nature of the data, market participants have been focusing on employment figures following Federal Reserve Chair Jerome Powell's acknowledgment of a softening labor market during his Jackson Hole speech. The Prime Market Terminal interest rate probabilities tool currently shows a 98% likelihood of a 25 basis point (bps) rate cut by the Fed.

Throughout the day, the US Dollar has continued to strengthen as traders secure profits ahead of the highly anticipated Nonfarm Payrolls report. Economists expect the report to show 75,000 new jobs added to the economy and a slight uptick in the Unemployment Rate to 4.3%.

However, Gold investors should remain cautious due to ongoing uncertainties surrounding US presidential policies, newly implemented tariffs, and the administration's conflict with Fed Governor Lisa Cook over allegations of mortgage fraud.

Further developments in this case, as well as the US Court of Appeals' ruling on the legality of certain tariffs, could potentially drive Gold prices higher.

Key market movers impacting Gold price dynamics

Economic data releases have been keeping bullion traders on their toes. Initial Jobless Claims for the week ending August 30 came in at 237K, surpassing estimates of 230K and increasing from the previous 229K.

The US Department of Commerce reported that the Trade Balance deficit widened to a four-month high in July, reaching $-78.3 billion from $-59.1 billion, exceeding forecasts of $-75.7 billion. The report indicated that companies rushed to secure supplies before tariff implementation, with deficits widening with both China and Mexico.

August's ISM Services PMI expanded to 52, up from 50.1 and beating expectations of 51. The prices-paid sub-component remained elevated at 69.2, the second-highest level since late 2022, reflecting the impact of tariffs.

ADP Employment Change for August showed an increase of 54K, below the forecasted 65K, though July figures were revised upward from 104K to 106K. Dr. Nela Richardson, chief economist at ADP, noted that "employment growth has been volatile this year, affected by various factors including labor shortages, consumer behavior shifts, and technological disruptions."

New York Fed President John Williams expressed expectations for gradual interest rate reductions over time, contingent on economic performance aligning with his forecasts. Fed Board Nominee Stephen Miran emphasized the paramount importance of the Fed's independence and refrained from commenting on potential presidential interventions in Fed affairs.

US Treasury yields are declining, with the 10-year note down over three and a half basis points (bps) to 4.183%. Real yields, calculated by subtracting inflation expectations from nominal yields, have decreased by nearly four basis points to 1.78% at the time of writing.

The US Dollar Index (DXY), which measures the greenback's performance against a basket of six major currencies, is up 0.25% at 98.39 as of this report.

Technical analysis: Gold price may test $3,500 support level soon

The Gold uptrend has paused as traders book profits, with XAU/USD retreating below the significant $3,550 threshold. The Relative Strength Index (RSI) is trending lower, approaching the 70 level in overbought territory. However, for the uptrend to be seriously challenged, sellers would need to push Gold prices below the $3,500 mark.

If XAU/USD manages to reclaim $3,550, traders may then set their sights on the all-time high of $3,578. A breakthrough above this level could open the door to $3,600. On the downside, a drop below $3,550 would expose the $3,500 support, followed by the August 29 high of $3,454, with $3,400 serving as the next potential floor.

Gold: Frequently Asked Questions

What drives investors to Gold?

Throughout history, Gold has served as a reliable store of value and medium of exchange. Beyond its aesthetic appeal and use in jewelry, the precious metal is widely regarded as a safe-haven asset, particularly attractive during times of economic uncertainty. Gold is also commonly viewed as a hedge against inflation and currency depreciation, as its value is not tied to any specific issuer or government.

Which entities purchase the most Gold?

Central banks are the largest holders of Gold reserves. In their efforts to support their currencies during turbulent periods, central banks often diversify their reserves by acquiring Gold to enhance the perceived strength of their economies and currencies. Substantial Gold reserves can serve as a source of confidence in a country's financial stability. According to World Gold Council data, central banks added 1,136 tonnes of Gold worth approximately $70 billion to their reserves in 2022, marking the highest annual purchase on record. Central banks from emerging economies such as China, India, and Turkey are rapidly increasing their Gold holdings.

How does Gold correlate with other assets?

Gold typically exhibits an inverse correlation with the US Dollar and US Treasuries, both of which are major reserve and safe-haven assets. When the Dollar depreciates, Gold tends to appreciate, allowing investors and central banks to diversify their portfolios during uncertain times. Gold also tends to move inversely to risk assets. A rally in the stock market often leads to weakness in Gold prices, while sell-offs in riskier markets tend to benefit the precious metal.

What factors influence Gold prices?

Gold prices can fluctuate due to a wide range of factors. Geopolitical instability or fears of a severe economic downturn can rapidly drive up Gold prices due to its safe-haven status. As a non-yield-bearing asset, Gold tends to rise when interest rates are lower, while higher interest rates usually exert downward pressure on the yellow metal. However, most price movements are closely tied to the behavior of the US Dollar (USD), as the asset is priced in dollars (XAU/USD). A strong Dollar typically keeps Gold prices in check, whereas a weaker Dollar often leads to higher Gold prices.