Will the Fed cut rate by .25/.50%, and how will this impact the price of Gold?

Will the Federal Reserve cut interest rates by 0.25% or 0.50%, and how will this impact the price of gold?

Gold prices hit record levels during the morning European sessions, with spot gold climbing to $2589.69 per ounce and December futures reaching $2617.35. This surge is fueled by heightened expectations that the Federal Reserve will enact a more substantial interest rate cut later this week.

A weaker dollar supported higher gold prices as markets awaited the Federal Reserve's upcoming meeting.

Gold experienced increased safe-haven demand following reports of a second assassination attempt on former President Trump, this time in Florida.

While the Fed is expected to cut interest rates on Wednesday, market sentiment is evenly divided between a 25 or 50 basis point reduction. 

According to CME FedWatch, the probability of a larger cut has gained traction due to concerns about labor market weakness. The Fed is also anticipated to begin an easing cycle this week, with analysts forecasting at least 100 basis points of cuts by year-end. Lower rates typically benefit precious metals, as they decrease the opportunity cost of holding non-yielding assets.

According to my analysis, the gold market appears poised for a substantial correction, signaling a potential bubble.

The Federal Reserve's actions have impacted gold prices
If the Federal Reserve implements an aggressive rate cut to 0.25% or 0.50%, it appears that gold has reached its upper limit, which could trigger profit-taking in the market.

Inflation forecast
The Fed's decision is likely to indicate a balanced perspective on inflation, implying that it is under control or within acceptable bounds. If inflation is not a major concern, the demand for gold as a hedge against inflation may decrease.

Investor Outlook
Gold has delivered over 20% returns in 2024. In my view, investor sentiment may shift toward riskier assets like equities, which are expected to perform better in a stable interest-rate environment. This shift could result in decreased demand for gold, contributing to a downward trend in its price.

Geopolitical turmoil
Due to geopolitical tensions like Israel and Hamas, it now looks like Gold will have no effect and is set to go lower. The conflict may lead to a decline in gold prices.

Profit-Taking by Short-Term Traders
Given ongoing concerns about overvaluation, short-term traders are likely to take profits at current price levels, employing profit-taking strategies that put additional downward pressure on gold prices.

What actions should traders consider at this point?

Given the current factors, during today's early European session, Spot Gold (XAUUSD) peaked at $2,589.69, potentially offering a strategic entry point.

If prices decline further, they may test last Friday's low of $2,556.52, which aligns with the 50-day moving average of $2,563.00. A breach of this support could lead to a move towards the 100-day moving average at $2,538.07, with further declines potentially reaching last week's low of $2,485.60.

Conversely, if upward momentum continues, there may be an attempt to surpass today's record high. Otherwise, based on the preceding analysis, Spot Gold (XAUUSD) prices are anticipated to decline.

If gold’s movement aligns with the previous analysis, a decline of over $100 could be expected in the coming days. Traders should capitalize on this potential discount and maximize their trading opportunities.

In the MCX Gold October Futures market, the morning rate of ₹73,753 per 10 grams serves as a key entry benchmark. Potential downside targets include the ₹73,200 range, aligning with the Fibonacci level of ₹73,074, which is close to last Friday's low of ₹73,081.

A drop below this level could signal a significant downtrend, with the next potential support around ₹71,870, which was last Thursday's low. If prices fall through this support, they may target last week's low of ₹71,127.

Conclusion

As a seasoned research analyst, effectively navigating financial markets demands a deep understanding of the complex factors involved. Although gold remains attractive amid geopolitical uncertainty, shifting central bank policies and economic data contribute to market volatility. Investors need to proceed with caution, leveraging their knowledge and strategic planning to navigate the volatility and capitalize on opportunities in this ever-changing environment.