Gold drops from historic highs despite Fed officials eyeing rate cut

• Gold prices fall to $2,457 after hitting an all-time high of $2,483 due to profit-taking.

• Fed officials signal potential rate cuts; Governor Waller suggests downward trend for Fed funds rate.

• US Dollar Index drops to 103.72, its lowest since March 2024, while US Treasury yields decline.

Gold prices retreated as investors took profits after the yellow metal rallied to an all-time high of $2,483 earlier during the North American session on expectations that the Federal Reserve would lower borrowing costs. At the time of writing, the XAU/USD trades at $2457, down more than 0.40%.

Federal Reserve officials, led by Governor Christopher Waller, crossed the wires on Wednesday. He said the time to cut the policy rate is approaching, suggesting that the most likely direction for the Fed funds rate is downwards.

Earlier, Richmond Fed President Thomas Barkin mentioned that inflation has decreased over the last quarter, acknowledging that the current policy is restrictive. However, he is open to the possibility that the policy "is not as restrictive as thought."

Meanwhile, US housing data fared better than expected in June, hinting the economy remains solid. Building Permits and Housing Starts improved compared to May, while Industrial Production decelerated but exceeded estimates.

The non-yielding metal's last leg-up was also driven by former President Donald Trump's comments, in which he favors tax reductions, lower interest rates, and increased tariffs. These would likely be inflationary for the economy and weaken the Greenback.

The US Dollar Index, which tracks the performance of the currency against other six, sinks some 0.49% at 103.72, its lowest level since March 21, 2024. US Treasury bond yields are also falling across the yield curve, with the 10-year Treasury note yielding 4.14%, down almost one and a half basis point (bps).

Daily digest market movers: Gold retreats as buyers take a breather close to $2,500

• Weaker-than-expected US Consumer Price Index (CPI) data sponsored Gold’s leg-up above $2,400, as the odds for Fed rate cuts increased, as reflected by falling US Treasury bond yields.

• The US economic calendar featured Building Permits for June, which increased by 3.4% from 1.3999 million to 1.446 million. Further housing data showed that Housing Starts for the same period expanded by 3% from 1.314 million to 1.353 million.

• US Industrial Production in June decelerated from 0.9% in May to 0.6% month-over-month (MoM) yet exceeded estimates for a 0.3% increase.

• December 2024 fed funds rate futures contract implies that the Fed will ease policy by 52 basis points (bps) toward the end of the year, up from 50 last Friday.

• Bullion prices retreated slightly due to the People's Bank of China (PBoC) decision to halt gold purchases in June, as it did in May. By the end of June, China held 72.80 million troy ounces of the precious metal.

Gold technical analysis: XAU/USD retreats below $2,460 as buyers take a breather

Gold’s uptrend is set to continue, though buyers are taking a respite after hitting all-time highs shy of $2,490. Momentum is still in their favor, as shown by the Relative Strength Index (RSI), which dipped slightly but is still bullish.

If XAUUSD resumes its uptrend, the first resistance will be the all-time high at $2,483. A breach of the latter will expose the $2,490 figure, followed by the $2,500 psychological level.

On the flip side, If XAU/USD drops below $2,450, the first support would be the $2,400 figure, followed by the July 5 high at $2,392. If cleared, Gold would extend its losses to $2,350.

Interest rates FAQs

What are interest rates?

Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%. If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.

How do interest rates impact currencies?

Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.

How do interest rates influence the price of Gold?

Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank. If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.

What is the Fed Funds rate?

The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure. Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.