Gold Rallies on Fed Rate Cut Expectations and Dollar Weakness

Gold prices surged as markets price in potential monetary easing amid economic uncertainty. Gold futures pricing closed higher on Tuesday, with the most active August futures contract gaining significant ground to settle at $3,349 .90 per ounce after factoring in today’s net gain of $34.90. After opening at $3315.70 August gold would trade to a high of $3370.50, and a of $3313.70. The rally over the last two days marked to a conclusion of the selling pressure that took gold futures from $3476.30 on June 16, to a low of $3250.50 that occurred yesterday.

Tuesday's gains capped a strong two-day recovery that has lifted gold approximately 2% from recent lows, marking an end to the selling pressure that drove futures from $3,476.30 on June 16 to yesterday's low of $3,250.50.

Fed Rate Cut Probabilities Drive Rally

The gold rally reflects growing market expectations for Federal Reserve interest rate cuts, amplified by continued dollar weakness. According to the CME's FedWatch tool, there is a 21.2% probability that the Fed will cut rates by 25 basis points at the July 30 FOMC meeting.

More significantly, markets are pricing in aggressive easing ahead. The probability indicator shows only a 7.3% chance that current Fed funds rates of 4.25%-4.50% will remain unchanged by the September 17 FOMC meeting conclusion. Instead, there's a 73.5% probability that rates will fall to the 4.00%-4.25%, with a notable 19.2% chance of a more aggressive 50 basis point cut to 3.75%-4.00%.

This dovish shift in expectations has been bolstered by recent comments from Federal Reserve Governor Michelle Bowman, who indicated last week that she would favor a July rate cut if inflation pressures remain contained. Fellow Governor Christopher Waller echoed similar sentiments, suggesting the Fed could consider easing as early as July.

Dollar Weakness Provides Additional Tailwind

The U.S. dollar's recent decline has provided crucial support for gold prices, making dollar-denominated commodities more attractive to international buyers while reducing the opportunity cost of holding non-yielding assets. This currency weakness, combined with pre-positioning by investors ahead of potential rate cuts, has created a powerful bullish catalyst for the precious metal.

Despite Chairman Jerome Powell's cautious stance regarding the "highly uncertain" economic path created by tariff policies, market participants are increasingly betting on monetary accommodation. 

Strong Institutional Demand Supports Outlook

Beyond monetary policy considerations, gold continues benefiting from robust institutional demand. Central bank purchases remain particularly strong, with China's central bank accumulating 2,285 tons in reserves, representing the most aggressive build-up since 2009.

Looking ahead, investors will focus on upcoming labor market data for signals that might accelerate the Fed's easing timeline. I believe gold will maintain its elevated trading range, with year-end targets of $3,560-$3,725 supported by monetary uncertainty, geopolitical risks, and sustained institutional buying.

Wishing you as always good trading,