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Gold Prices Forecast: Will Fed’s Caution Continue to Cap Gains, Weaken Prices?

Weekly Recap: Mixed Signals for Gold Prices
Gold prices showed mixed movements this week, closing lower for the second consecutive week while posting a fourth monthly gain. This suggests a complex market situation with potential short-term bearish sentiment but long-term bullish factors. After reaching an all-time high of $2,449.89 on May 20, gold prices have faced downward pressure, possibly due to profit-taking or long-liquidation by traders.

Last week, XAU/USD settled at $2327.20, down $6.80 or -0.29%.

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Impact of U.S. Inflation Report and Federal Reserve Policy
The release of the April Personal Consumption Expenditures (PCE) Price Index on Friday showed a 0.3% increase, matching expectations, and a 2.7% rise annually. Despite meeting forecasts, the data indicates that inflation remains above the Federal Reserve’s 2% target. Federal Reserve officials have reiterated that several months of lower inflation are required before considering rate cuts. This cautious stance has left traders uncertain, with a September rate cut still seen as a possibility but not guaranteed.

Market Reactions to Employment Data
Weak U.S. employment data this week, with initial jobless claims reaching their highest point since August 2023, has influenced market expectations towards a more dovish Federal Reserve. However, U.S. Treasury yields remained mostly unchanged, reflecting cautious investor sentiment. Federal Reserve Bank of Dallas President Lorie Logan emphasized that while progress towards the inflation target is evident, it is too early to cut interest rates.

Safe-Haven Demand and Central Bank Buying
Gold’s appeal as a safe-haven asset continues to be supported by ongoing geopolitical risks and potential central bank purchases. These factors have helped stabilize gold prices, despite weaker-than-expected U.S. GDP data.

However, even central bank’s have a price limit and since they don’t announce their buying, some investors could be reacting to stale data. Furthermore, central bank’s are allowed to book profits. Because of the delays in getting reports on central bank activity, for all we know, they may be reducing their long positions and their buying.

Nonetheless, the market’s focus on the Federal Reserve’s gradual approach to achieving its inflation target, combined with global economic uncertainties, supports a bullish outlook for gold in the long term.

Market Forecast for Next Week
Looking ahead, gold prices are expected to remain volatile, influenced by ongoing economic data and Federal Reserve policy signals. In the short term, gold may face downward pressure due to profit-taking or long-liquidation following the recent rally. The second straight weekly loss indicates some traders are securing gains amidst uncertainty over the Fed’s rate cut timeline.

However, the long-term outlook remains bullish, supported by expectations of eventual rate cuts, ongoing geopolitical risks, and the return of strong central bank demand.

Investors should closely monitor upcoming U.S. job data, inflation reports and Federal Reserve commentary for further direction. While short-term bearish pressures may persist, the overall market sentiment favors a bullish trend for gold over the long term. Traders should prepare for potential short-term fluctuations but remain optimistic about gold’s prospects in the latter part of the year.

Source: Fxempire