Trader Confident in First Rate Cut by the Fed in September! Gold Skyrockets to Hit Another Record High

Traders are now 100% certain that the Federal Reserve will cut interest rates in September.

According to the CME Group's FedWatch Tool, there is a 93.3% probability that the Federal Reserve will cut interest rates by 25 basis points in September, bringing the federal funds rate from the current range of 5.25%-5.5% to 5%-5.25%.

The tool also shows that traders expect a 6.7% probability of a 50 basis points rate cut by the Federal Reserve in September, which may reflect some traders' belief that the Fed will cut rates at the end of July and again in September. Overall, traders see a 100% probability of a rate cut by the Federal Reserve in September.

The increasing expectations of a rate cut by the Federal Reserve in September have also boosted demand for gold. During the U.S. session on Tuesday, gold broke through the $2450 mark, hitting a new all-time high, rising nearly $30 intraday, with an increase of over 1%.

The catalyst for this market speculation was the CPI data for June released last week, which showed a 0.1% month-on-month decrease in CPI data for June. This brought the year-on-year growth rate down to 3%, the lowest level in three years. A month ago, traders believed the probability of a rate cut by the Federal Reserve in September was around 70%.

UBS strategist Joni Teves stated in a report, "With strong gold popularity, investors' interest in 'buying on dips' remains prevalent, which may be the reason for gold's rapid rise due to weak U.S. data and dovish expectations from the Federal Reserve."

Teves continued, " As gold is still trading slightly above the psychological level of $2400, we believe the risk is skewed to the upside. We believe there is still room for investors to build gold exposure."

In the first half of 2024, increased global geopolitical risks boosted interest in safe-haven assets, and central bank demand has surged for many years, driving gold prices to record highs. According to data from UBS Group, central bank purchases of gold are at their highest level since the late 1960s.

In a report last month, UBS Group wrote, "As some central banks now question the safety of holding assets denominated in dollars and euros, especially after financial and debt crises and the Russia-Ukraine conflict, many central banks are choosing to fill their foreign exchange reserves with gold."

The CME Group's FedWatch Tool calculates probabilities based on trading activity in federal funds futures contracts on the exchange. Traders on this exchange can bet on the effective federal funds rate levels within 30 days.

In simple terms, this reflects where traders are allocating their funds. While the actual probability of the Federal Reserve maintaining the current rate levels in September has not yet dropped to zero, it at least means that no traders are willing to bet on that outcome. Federal Reserve Chairman Powell's recent hints have also strengthened traders' confidence that the Fed will cut interest rates for the first time in September. On Monday, Powell stated, "The Fed will not wait for inflation to fall completely to the 2% target level before starting to cut interest rates, as there is a lag effect in tightening policies."

He said the Fed is seeking "greater confidence" to confirm that inflation will return to the 2% level. Powell added, "Factors that can enhance this confidence are more good inflation data, and recently we have indeed seen some."