Ahead of the Fed Decision, Gold Hits a One-Week Low as a Strong Dollar and Middle East Tensions Put Bulls Under Pressure!
As the Federal Reserve's interest rate decision approaches, gold prices fell to a one-week low on Tuesday. Meanwhile, the U.S. Dollar Index remained near a one-month high, while oil prices fluctuated sharply amid mixed signals surrounding potential U.S.-Iran talks and renewed conflict. Although Treasury yields edged lower, they remain at elevated levels overall.
The main driver behind Tuesday's decline in gold was the continued strength of the U.S. dollar. Market participants generally attribute this to a significant reassessment of the Federal Reserve's policy outlook over recent months. Since the escalation of military conflict between the U.S., Israel, and Iran, sharp swings in energy prices have intensified inflation concerns. At the same time, newly appointed Federal Reserve Chair Kevin Warsh's hawkish remarks have reinforced expectations that interest rates will remain higher for longer. Persistently high energy prices continue to be viewed by Fed officials as a key inflation risk, leading markets to price in a more hawkish policy stance, stronger rate hike expectations, and a firmer dollar, all of which have weighed heavily on gold.
Current market pricing suggests there is approximately a 71% probability that the Federal Reserve will leave interest rates unchanged on Wednesday. However, the probability of a September rate hike has risen to around 75%, with some market participants estimating nearly a 30% chance of a 25-basis-point hike as early as this week. Commerzbank has lowered its year-end gold price target by US$300 to US$4,500 per ounce. Since the conflict intensified at the end of February, gold prices have fallen by approximately 24%, reflecting the market's pricing of a prolonged higher-interest-rate environment.
Developments in the bond market further support this outlook. Although lower oil prices pushed both the 10-year and 30-year U.S. Treasury yields lower for a third consecutive session, with the 10-year yield falling to around 4.588%, yields remain near multi-month highs. The two-year Treasury yield also declined but is still on track for its fifth consecutive monthly increase. Inflation expectations remain relatively anchored, with the 5-year and 10-year TIPS breakeven inflation rates standing at approximately 2.17% and 2.20%, respectively. While long-term inflation expectations remain stable, short-term risks stemming from energy market disruptions have not fully disappeared. Together, these factors continue to create a challenging macroeconomic backdrop for gold in the near term.
The shipping crisis in the Strait of Hormuz remains a major source of uncertainty hanging over global energy and commodity markets. Before the conflict, the strait handled roughly one-fifth of global oil and liquefied natural gas shipments. Since Iran assumed effective control and limited passage to its own vessels, global supply chains have faced significant disruption. Oman's proposal to establish a voluntary fee system with joint management—similar to the existing mechanism in the Strait of Malacca—aims to ease tensions. However, major disagreements remain between the U.S. and Iran over the legality of the fees and control of the waterway. As a traditional safe-haven asset, gold would normally benefit from such geopolitical uncertainty, but continued pressure from higher interest rates and a stronger dollar has outweighed its safe-haven appeal, highlighting the market's strong focus on real interest rates.
Market Insight:
Gold continues to trend lower on the 4-hour chart, with both the MACD lines and histogram expanding further below the zero line. In the short term, gold's direction will largely depend on the signals delivered by the Federal Reserve. If the policy statement and Chair's remarks reinforce expectations of higher rates for longer, gold could move lower to test key support levels. On the other hand, any signs of a more moderate stance or a downplaying of energy-driven inflation risks could trigger a technical rebound.
