Gold price forecast (XAU): Dollar strength limits gold rise ahead of key inflation data

Dollar strength dampens gold prices

The US dollar index rose slightly, remaining near a 13-month low, but showed signs of stabilizing after weeks of decline. The dollar's strength has put pressure on gold, as a stronger greenback makes the precious metal more expensive for holders of other currencies. This follows a period of sustained dollar weakness driven by expectations of interest rate cuts by the Federal Reserve.

Expectations of a Fed interest rate cut are rising

Recent comments from Federal Reserve Chairman Jerome Powell have increased market expectations for a rate cut at the central bank's September meeting. Traders are now pricing in a 66% chance of a 25 basis point cut, with a growing minority seeing a 34% chance of a more aggressive 50 basis point cut. The Fed's dovish move, coupled with ongoing uncertainty about inflation, has made gold traders nervous.

Influence of US economic data on market sentiment

The upcoming PCE report is likely to be a key factor in market sentiment. This data, closely watched by the Fed as a key inflation indicator, is likely to influence the timing and magnitude of any rate cuts. A strong reading could challenge the current market consensus and potentially reduce the likelihood of a more significant rate cut. Conversely, a weaker-than-expected result could further support gold prices as it increases the likelihood of aggressive monetary easing.

Outlook for the gold price

Despite the recent decline, gold remains in a generally bullish environment, supported by the expected start of a Fed rate-cutting cycle. However, price direction in the near term will largely depend on the upcoming US economic data, especially the PCE report. If the data reinforces expectations of lower rates, gold could reach new highs. On the other hand, a surprise rise in inflation could limit gold's upside and support the dollar, keeping gold prices in check.

In summary, while the immediate outlook for gold appears mixed, the overall trend remains favorable for the precious metal, especially if the Federal Reserve begins to ease monetary policy as expected. Traders should keep a close eye on the PCE data for clues as to where gold prices are headed next.

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