Monday saw a confident rise in precious metals amid a weakening US dollar. The dollar index (DXY) remained stuck at two-week lows, while markets actively reassess their expectations for further tightening of the Federal Reserve's monetary policy.
At the time of writing the analysis, gold rose by 0.35%, reaching the level of $4170 per ounce. Silver, in turn, gained 0.23%, stopping at $63. Both metals continue their upward movement that began after the release of weak US labor market data for June. It was this report that served as a catalyst for a shift in sentiment in the interest rate market.
Why the Labor Market Changed the Game
The US economy created only 57,000 new jobs — almost half the consensus forecast of 113,000. Moreover, data for April and May were revised downward by a total of 74,000 positions. The unemployment rate, meanwhile, unexpectedly dropped to 4.2%. This statistic is a powerful signal that the labor market is cooling faster than anticipated.
Precious metals, which generate no direct income, are extremely sensitive to the cost of money. The Fed's hawkish rhetoric and high rates make holding gold and silver less attractive. However, as soon as rate forecasts soften, metals immediately benefit. This is exactly what we are observing now.
Fed Rates: Probability of a Hike Melting Before Our Eyes
The CME Group's FedWatch tool records a sharp decline in the probability of a rate hike at the July meeting — to 21.9% versus 29.9% a week earlier. The probability of maintaining the current rate level rose to 78.1%. September contracts also reflect a softening: the cumulative probability of at least one hike decreased from 59.4% to 53%, and the probability of two hikes fell from 12.6% to 8.7%.
An additional factor putting pressure on the dollar was comments from Fed Chairman Kevin Warsh. He stated that inflation risks have diminished and reaffirmed a commitment to price stability at the European Central Bank forum in Sintra. Markets interpreted this as a signal for a pause in the tightening cycle.
This week, traders will be closely watching the release of the minutes from the June Fed meeting. However, the key event will be the inflation report on July 14 — it is these figures that will determine the further direction of both the dollar and precious metals.
My analysis: The current situation creates an extremely favorable backdrop for gold and silver growth in the short term. However, one should not forget that any unexpectedly strong inflation report could instantly reverse the trend. Investors should hedge risks and closely monitor the macroeconomic calendar.