Gold holds near $4,500 as Waller cools Fed hike bets

Gold prices hovered close to $4,500 per ounce on Thursday following a 2% surge the previous day, as Federal Reserve Governor Christopher Waller expressed support for maintaining interest rates if inflation continues to decelerate. A weaker dollar and reduced Treasury yields bolstered the market, while traders anticipated Friday's U.S. payrolls report and upcoming inflation data.

At 21:03 ET (01:03 GMT), XAU/USD climbed 0.1% to $4,479.58 per ounce, whereas Gold Futures slipped 0.3% to $4,525.49. XAG/USD edged up 0.1% to $67.05 per ounce, and XPT/USD declined 0.5% to $1,813.71. The U.S. Dollar Index remained relatively unchanged at 98.98.

Gold rebounded nearly 2% on Wednesday, breaking a three-day losing streak and extending the recovery on Thursday. This surge was fueled by Waller's suggestion that he might back keeping interest rates unchanged at the Fed's September 15-16 meeting if future data confirm that inflation is subsiding. Waller indicated that August inflation figures would heavily sway his decision, yet he still kept the door open for rate hikes if price pressures resurface. He noted that recent data, however, revealed signs of disinflation.

Market sentiment shifted sharply on expectations of a September rate increase, reducing the probability to an even 50% from around 70% earlier in the week. Lower interest rates typically favor gold since the precious metal yields no interest, diminishing the advantage of holding interest-bearing assets when borrowing costs fall.

The dollar weakened, partly due to the Japanese yen's surge of nearly 2% on Thursday, marking its strongest day since Japanese and U.S. authorities intervened in currency markets over a month ago. Traders remained watchful for further intervention from Tokyo.

A weaker dollar made gold more affordable for buyers using alternative currencies. Friday's U.S. nonfarm payrolls report would serve as the next critical test for the rate outlook. Gold had rebounded from a steep decline earlier in the week, when it had plummeted to around $4,282, its lowest level in nearly four weeks, before the recovery took hold.

Tony Sycamore, a senior market analyst at IG, attributed the latest gains to some easing of pressure from energy prices, Treasury yields, and the dollar following indications that the latest Middle East flare-up might have peaked. Improved risk sentiment also contributed to the upward movement. Sycamore stated that gold remained above the $3,942 low seen in late June, supporting his medium-term perspective that the metal had formed a base at this level.

Despite a technical breakdown below the 200-day moving average around $4,526 the previous week, causing short-term damage, Sycamore maintained his broader view that gold had established this foundation. Gold's sensitivity to Middle East developments was evident, as earlier conflict had lifted oil prices and reignited inflation concerns, but a reduction in energy pressure had eased this headwind lately.