Gold prices edged higher in Asian trading on Thursday, staying close to record highs as traders remain optimistic about a lower interest rate environment benefiting the precious metal.
However, expectations for a large interest rate cut by the Federal Reserve have significantly decreased after US core consumer price index (CPI) inflation for August came in higher than anticipated. The CME FedWatch Tool now indicates an 85% probability of a 25-basis-point rate cut next week, with just a 15% chance of a larger 50-basis-point cut. This marks a shift away from earlier hopes of a more aggressive rate cut.
While overall consumer price inflation eased more than expected—falling to 2.5% in August from 2.9% in July—core inflation held steady at 3.2%, with the monthly core figure rising to 0.3%, above the forecast of 0.2%. This stubborn core inflation reduces the likelihood of deep rate cuts by the Fed.
As of 07:40 GMT, spot gold (XAU/USD) was trading at $2,518.65. Traders will now be closely monitoring the upcoming producer price index (PPI) inflation data for further signals on inflation trends.
Despite the more modest rate cut expectations, lower interest rates still present a favourable scenario for gold. With reduced rates, the opportunity cost of holding non-yielding assets like gold decreases, potentially supporting further gains in the yellow metal.
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