Gold (XAU/USD) bullish bias resumes as rate-cut hopes increase

Gold (XAU/USD) has started the week off strong pushing beyond the previous all-time high set in April. The precious metal continues to find support from expectations of rate cuts from the Federal Reserve, which have strengthened after the CPI reading last week. Whilst the data was nothing to write home about, it confirmed the expectations for a decline and evidenced a return to the disinflation process. This alleviated growing concerns over a reacceleration in inflation, which continuously pushed back rate-cut pricing in markets since the start of the year.

Whilst it is still early to determine whether this is a turning point in inflation risk appetite in markets has improved, with two 25 bps rate cuts almost fully priced in for the remained of the year. Stocks have continued their buoyant ascent to new highs whilst the US dollar has pulled back to a five-week low.

For gold, the higher conviction of lower rates has enabled the bullish momentum to take hold once again after a few weeks of correction and downward pressure. Let’s not forget that despite the relative calm in the Middle East in the past weeks, investors continue to eye the conflict as a potential sign of disruption and risk, which has been keeping gold supported even if not rallying. So far, XAU/USD has remained above $2,275 even as the short-term bias turned lower.

Technically, gold is starting to push the overbought boundaries once again, but that hasn’t deterred buyers in the past. The RSI is hovering just below 70 but the indicator has been pushed up to 84.5 in the past few months before a reversal has taken place, so there is no immediate pressure to sell just yet. The path of least resistance is likely to continue to be higher in the coming weeks, although investors should be aware of any commentary stemming from FOMC members that suggests markets are incorrect in pricing rate cuts for this year. This would likely be the catalyst for a deeper selloff in XAU/USD. Alternatively, greater concerns about economic growth, both from weakening data or another rise in geopolitical risks, would likely push gold even further higher. $2,500 is likely to be the next psychological target that could offer some resistance.

XAU/USD daily chart

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