Gold prices increased during the North American session on Friday as the US dollar weakened, with traders securing profits before the weekend. Dovish comments from a Federal Reserve Governor have supported expectations for a rate cut in July, aiding the rise of gold prices to $3,353, up 0.43%.
The mood in the market lifted as the University of Michigan revealed increasing consumer optimism about the economy and a potential decline in inflation. Christopher Waller, a Fed Governor, proposed interest rate cuts, causing US Treasury yields to drop, benefiting gold prices.
Us dollar and consumer sentiment
The US Dollar Index fell by 0.13% to 98.48, making gold cheaper for foreign buyers. Forecasts for monetary easing by year-end have shifted to 45 basis points, up from 42 basis points previously.
The Consumer Sentiment Index showed an improvement from 60.7 to 61.8, anticipating lower inflation rates. Despite strong retail sales reflecting tariff-induced price hikes, US economic data shows mixed inflation trends with a dip in the Producer Price Index.
Treasury yields fell, enhancing gold’s appeal, with a 10-year Treasury yield decrease of three basis points to 4.421%. Current interest rate probabilities suggest a 94% chance for maintaining rates at the July meeting, with a 6% chance of a rate cut.
Gold price speculation
Gold is expected to stay near $3,350. Breaching $3,377 resistance could target $3,400, while dropping below $3,300 might see further declines.
We see the recent price action in gold, now trading around $2,350, as a direct response to shifting monetary policy expectations. Comments from figures like Waller signal a potential pivot towards rate cuts, which historically benefits non-yielding assets. This outlook is bolstered by the latest Producer Price Index (PPI) which unexpectedly fell 0.2% in May, suggesting inflation is cooling faster than anticipated.
The drop in U.S. Treasury yields, with the 10-year note hovering near 4.25%, directly reduces the opportunity cost of holding gold. While the US Dollar Index remains elevated around 105, derivative markets are pricing in future weakness based on anticipated rate cuts. Historically, the six months leading into the first Fed rate cut have seen gold post average gains of over 8%, a pattern we expect could repeat.
We note that the CME FedWatch Tool now indicates a nearly 65% probability of a rate cut by the September meeting, making long-dated call options an attractive strategy. Traders should consider buying calls or bull call spreads to capitalize on potential upward moves, especially if the price breaks the key resistance level near $2,377. Conversely, using the $2,300 level as a guide for placing protective puts can help manage downside risk if economic data unexpectedly strengthens.
