Gold hits new high under Federal Reserve interest rate cut expectations, inflation data becomes short-term key

On Tuesday (September 9), the price of gold continued its record rally, buoyed by market expectations that the United States will cut interest rates in September. According to CME FedWatch, traders believe that the probability of the Federal Reserve cutting interest rates by 25 basis points in September is 92%. At present, traders believe that the probability of the Federal Reserve cutting interest rates by 25 basis points next week is 92%. Some traders even bet that the rate cut may reach 50 basis points. That probability is up from 88 per cent last week, reflecting heightened concerns about labour market weakness, with the likes of Macquarie and Barclays raising their forecasts for total Fed rate cuts in 2025 to more than 100-year basis points.

This follows data released on Friday showing that US job growth slowed sharply in August, which further strengthened the expectation of interest rate cuts. Lower interest rates usually weigh on the dollar and bond yields, which in turn enhances the attractiveness of gold, which has no interest income attribute. The dollar index has risen, but it is still hovering near seven-week lows; the yield of the US benchmark 10-year Treasury note is also recovering after hitting a five-month low earlier. The dollar index is currently trading at 97.69, down 0.03% from last week, and the 10-year Treasury yield has retreated to 4.07%. CNBC analyst Nikos Tzabouras pointed out that the moderate July CPI data (up 2.7% year-on-year, lower than the expected 2.8%) has pushed the probability of a September rate cut to 97%.

The rally was driven not only by Federal Reserve policy expectations, but also by global geopolitical uncertainty and continued central bank demand for gold. According to the World Gold Council's 2025 Mid-Year Outlook report, gold has rallied 26% in the first half of the year, reaching more than 40 all-time highs, far outpacing other major asset classes. Gold is serving as an ideal hedge against stagnant inflation (stagflation), recession, and U.S. policy risks, especially in the context of Trump's tariff policy exacerbating trade uncertainty.

Inflation data sets the tone for the short-term trend, and institutions are optimistic about the market outlook

Investors are watching inflation data this week for more clues on interest rate cuts ahead of the Federal Reserve's meeting next week, with producer price data due on Wednesday and consumer price data on Thursday. Economists expect PPI month-on-month to rise 0.2%, year-on-year 3.3%, while the consumer price index is expected to rise 0.2% month-on-month, year-on-year 2.6%; if the data is lower than expected, it will strengthen the Federal Reserve's "gradual interest rate cut" path, and if this week's PPI data shows that the annual increase is lower than 3.3% expected, it will further suppress the dollar and support the rise of gold, Capital website analyst Kelrida stressed that if this week's PPI and CPI data confirm that inflation is cooling, the probability of a 50 basis point interest rate cut may rise to more than 20%, pushing the gold test $3600-3800 range.

Oxford Economics has warned that prices for tariff-related goods are rising rapidly, which could lead to higher-than-expected PPI and raise fears of an inflation rebound, which will temporarily weigh on gold; Wyckoff, senior analyst at Kitco Metals, said low PPI would "directly benefit gold and push prices towards $3,700".

Morgan Research expects gold to average $3,675 in the fourth quarter of 2025 and rise to $4,000 by the second quarter of 2026, benefiting from central bank purchases of 900 tonnes (mainly from China and emerging markets); Sprott Asset Management CEO John Champaria's optimistic view is supported by Standard Chartered analyst Suki Cooper, who forecasts gold will enter a seasonally strong period and reach new highs before the end of the year.

John Champaria, chief executive of Sprott Asset Management, said: "Even at $3,600 an ounce, we are still very optimistic about gold - we think the market will continue to rise because we haven't seen signs that could lead to a trend shift in terms of tariffs, trade relations (and) geopolitics. If any of the above areas improve... I think the upward momentum in gold prices could pause." Mr. Melek added: "If the U.S. economy weakens further, essentially that means we could see more money flowing into non-traditional asset classes like gold to hedge against potential downside risks to the economy."