Prospect of imminent Fed rate cut supports gold

Gold continued its rally at the start of the second quarter, driven by the Federal Reserve's imminent decision to cut interest rates and heightened geopolitical tensions. Moreover, the prospect of monetary easing is also relevant for other major central banks.

The Fed’s preferred gauge of underlying inflation — the core personal consumption expenditures index — cooled in February. That adds to the case for a reduction in borrowing costs, although the US central bank has maintained a cautious tone.

After the inflation figures, Fed Chair Jerome Powell said the prints were “pretty much in line with our expectations”. Later this week, investors will get a further chance to gauge the outlook for the US economy and central bank policy, with monthly payrolls expected to increase by at least 200,000 for a fourth straight month.

Swaps markets are pricing in a 61% chance of a Fed cut in June, up from 57% on Thursday. Lower rates are typically positive for gold.

Inflation data, and Powell’s comments in particular, have provided a further boost to gold, with the market becoming increasingly convinced that the Fed will start to cut rates in June.

In addition, China has been a strong source of demand for the yellow metal over the past year and a half. The country's central bank has added significant amounts of gold bullion to its reserves, boosting holdings in each of the past 16 months. 

The metal’s positive prospects have been endorsed by a slew of leading banks. Among them, JPMorgan Chase & Co. said last month that the metal was its No. 1 pick in commodities markets, and the price may reach $2500 an ounce this year. Goldman Sachs Group Inc. said it sees potential for $2300, highlighting the benefits from a lower interest-rate environment.

However, from a technical point of view, gold appears to be overbought, as evidenced by the formation of a divergence between the price and the RSI indicator. This indicates a probable correction of gold to the level of 2200 in the near future.

The overall recommendation is to buy gold after its correction to the 2200 level.

Profit could be taken at the level of 2400.

Loss may be fixed at the 2000 level.