• Gold has pulled back from new all-time highs above $2,530 on Wednesday. 
• Changing perceptions about the outlook for the US economy could be impacting demand. 
• Positioning remains overbought, although China demand is a key bullish driver. 

Gold (XAU/USD) pulls back to the $2,510s on Wednesday after touching a new all-time high of $2,531 on the previous day. The correction coincides with a slight bounce in the US Dollar (USD), to which Gold is negatively correlated. 

The US Dollar Index (DXY) made a new year-to-date low of 101.31 early on Wednesday before rebounding to the 101.50s as the European session progresses.

Gold impacted by interest rate expectations, outlook for US economy

Gold’s correction and the rebound in the US Dollar could be due to changing perceptions regarding the outlook for the US economy, which in turn impact the future course of interest rates in the country, a key driver of both assets. 

Traders in interest rate futures are pricing in around a 30% chance the Federal Reserve (Fed) will cut interest rates by an unusually big 0.50% in September, whilst a regular 0.25% is now fully priced in. 

Although this is lower than the 50% chances last week, the likelihood of a jumbo rate cut remains relatively high. The expectation of lower interest rates is positive for Gold as it lowers the opportunity cost of holding the non-interest paying asset. 

The extent to which the market is pricing in Fed rate cuts has been criticized as reflective of an overly pessimistic outlook, according to some strategists – it supposes a hard landing for the US economy which is far from assured