Market Analysis

Gold is trading in the $2,360s per ounce on Friday after bouncing back from the 50-day Simple Moving Average (SMA). This rebound follows a steep decline the previous day, driven by technical traders capitalizing on the recovery. On Thursday, gold dropped over 1.0% as it followed the broader commodity market lower due to global growth concerns.

Gold's Sell-Off Intensifies Following US GDP Data

Gold's decline was further fueled by the release of preliminary US Gross Domestic Product (GDP) data, which revealed an annualized growth rate of 2.8% for the second quarter. This figure surpassed market expectations of 2.0% and was significantly higher than the 1.4% growth rate in the previous quarter. The stronger-than-expected economic performance suggests that the US economy is faring better than anticipated, potentially leading the Federal Reserve (Fed) to maintain higher interest rates for a longer period to manage inflation. This scenario diminishes the appeal of gold, a non-interest-bearing asset, to investors.

Despite the GDP surprise, market expectations for interest rate cuts remain unchanged. Traders are still pricing in a 0.25% rate reduction by the Federal Reserve in September, with two additional cuts anticipated by the end of the year.

Potential Impact of Inflation Data on Gold

Gold could experience further volatility on Friday following the release of the June core Personal Consumption Expenditures (PCE) Price Index, the Fed's preferred inflation measure. The outcome of this data could influence future interest rate decisions and, consequently, the gold market.

Currently, the Fed is expected to lower interest rates by 0.25% in September, from an upper range of 5.50% to 5.25%. Additionally, the CME FedWatch tool indicates a better than 50% chance of two more 0.25% rate cuts by year-end. The core PCE Index was last recorded at 2.6% year-over-year in May, with expectations for June predicting a drop to 2.5%, approaching the Fed's 2.0% target. A lower-than-expected reading could increase the likelihood of additional rate cuts after September, while a higher-than-forecast result might dampen these expectations.

Technical Analysis: Gold Tests 50-Day SMA Support

Gold is currently navigating a new downtrend within a broad range established since May, reflecting a sideways market rather than a clear directional trend. The recent downtrend has encountered support at the 50-day SMA at $2,360, leading to a slight rebound. Should gold close below this SMA, it may extend its decline toward the next support level at the base of the widening range and the 100-day SMA, around $2,320.

Paraphrasing text from "FX Street" all rights reserved by the original author.