Gold Futures Dip Slightly as September Rate Cut Remains Highly Probable

Gold futures basis the most active August contract experienced a marginal decline today, settling at $2463, down $4.70 as of 5:00 PM ET. Despite reaching an intraday high of $2488.40—a new historical peak—profit-taking led to a slight retreat. The outlook for gold remains bullish, bolstered by the high likelihood of a Federal Reserve rate cut in September.

The CME's FedWatch tool indicates a 98.1% probability of the Federal Reserve initiating interest rate normalization in September. Interest rate futures traders anticipate a 93.5% chance of a quarter-point cut and a 4.6% likelihood of a half-point reduction. Only a 1.9% probability exists for maintaining the current benchmark rate of 5.25% to 5.5%.

This strong conviction in a September rate cut, the first since the Fed began its restrictive monetary policy in March 2022, stems from recent statements by Fed officials, including Chairman Powell. Speaking at the Economic Club of Washington, Powell noted that inflation reports over the past three months have instilled "greater confidence" in the effectiveness of their restrictive policy. These reports suggest inflation is on a sustained path toward the 2% target, alleviating earlier concerns that had prompted some officials to advocate for tighter policies.

Federal Reserve Governor Christopher Waller, at a Kansas City Fed event today, stated that the time for a U.S. central bank interest rate cut is "drawing closer." However, he tempered expectations by acknowledging the economic uncertainty that clouds the exact timing of such a move.

Waller remarked, "I believe current data are consistent with achieving a 'soft landing,' and I will be looking for data over the next couple months to buttress this view ... While I don't believe we have reached our final destination, I do believe we are getting closer to the time when a cut in the policy rate is warranted."

Investors now await the July Personal Consumption Expenditures (PCE) price index report, due on Friday, July 26. This report is expected to show continued inflation decline and will provide crucial data for Fed officials ahead of the July 31 FOMC meeting. Currently, futures traders see only a 4.7% chance of a July rate cut, with a 95.3% probability of maintaining the current benchmark rate.

Wishing you as always good trading,