Weaker U.S. Dollar Supports Gold Prices as Inflation Data Reinforces Expectations of a Fed Pause

Gold prices rose last Friday (14th), ending the week higher. Market attention remained focused on the latest U.S. inflation and employment data. Both sets of figures were broadly in line with expectations, while signs of cooling in the labor market reinforced expectations that the Federal Reserve (Fed) will keep interest rates unchanged next month. Meanwhile, the U.S. Dollar Index also weakened, making dollar-denominated gold more attractive to overseas buyers.

Spot gold rose 0.7% to US$4,379.95 per ounce, after briefly reaching US$4,449.39 intraday—the highest level since June 5. December gold futures gained 0.4% to settle at US$4,437.30 per ounce. Overall, gold rose 0.9% for the week.

Dollar Pullback Becomes a Key Support for Gold

The decline in the U.S. Dollar Index was one of the main external factors supporting gold prices during the session. The index fell approximately 0.3%, reducing the relative cost of purchasing dollar-denominated gold for holders of other currencies and potentially supporting overseas demand.

In precious metals markets, the U.S. dollar and gold prices often move inversely. When the dollar weakens, gold typically finds greater support. Conversely, when the dollar strengthens, gold may come under pressure.

Therefore, traders should monitor not only gold prices themselves, but also movements in the U.S. Dollar Index, U.S. Treasury yields, and changes in expectations for Fed policy.

Softer Inflation and Employment Signals Boost Expectations of a Fed Hold

U.S. nonfarm payrolls for July unexpectedly declined, while the inflation data released during the week was broadly in line with market expectations. Together, these developments reduced market expectations for further near-term rate hikes by the Fed.

Most analysts currently expect the Fed to maintain its policy rate within the 3.50% to 3.75% range. According to the CME FedWatch Tool, the market is pricing in a 33% probability of a Fed rate hike in September, down significantly from 55% a week earlier.

Interest-rate policy has a major impact on gold. Since gold does not generate interest income, the opportunity cost of holding it tends to rise when interest rates are expected to increase. However, if rates remain unchanged—or if markets begin to anticipate future rate cuts—gold may become relatively more attractive.

If the Fed does refrain from further rate hikes, gold prices could still have room to move higher.

Geopolitical Risks and Rising Oil Prices Add Uncertainty to the Inflation Outlook

In addition to the dollar and interest-rate outlook, markets are closely monitoring shipping risks around the Strait of Hormuz. Recent reports indicate that more vessels have come under attack, while the United States has said it may maintain its maritime blockade of Iran indefinitely, pushing oil prices higher over the week.

However, rising oil prices are not an entirely one-way bullish factor for gold. In the short term, geopolitical tensions and increased safe-haven demand may support gold. But if oil prices continue to climb and drive inflation higher again, markets may reassess the likelihood of central banks maintaining elevated interest rates—or even raising rates further—potentially limiting gold’s upside.

Continued gains in oil prices could intensify inflationary pressure and lead central banks to adopt a more hawkish policy stance, which may not necessarily be favorable for metals markets.

Market Outlook: The Dollar, Fed Expectations, and Oil Prices Remain Key

In the near term, whether gold can extend its gains will depend on several key factors:

• Whether the U.S. Dollar Index continues to weaken: A softer dollar generally supports dollar-denominated gold and other commodities.
• Changes in Fed policy expectations: Inflation, employment, and retail-sales data may all influence market views on the future interest-rate path.
• U.S. Treasury yield movements: Lower yields generally reduce the opportunity cost of holding gold.
• Oil prices and geopolitical risks: Safe-haven demand may lift gold prices, but higher oil prices could also reignite inflation concerns.
• Physical gold demand: Gold discounts in India have widened to their highest level in more than two months, suggesting that some physical demand remains under pressure and warrants continued attention.

For CFD traders, the relationship between the U.S. dollar, gold, crude oil, and related indices offers multiple perspectives for monitoring market opportunities. Whether taking a bullish or bearish view, it is essential to establish a clear trading plan, manage leverage and position risk, and stay alert to price volatility around major economic data releases.

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