Gold up 1% as oil prices take a breather ahead of consequential Fed rate decision

Gold prices on Wednesday snapped a two-day losing streak, as a fall in oil prices offset expectations for a Federal Reserve rate hike. 

At 13:01 ET (17:01 GMT), spot gold rose 1.2% to $4,344.14/oz, while gold futures advanced 1.2% to $4,385.59/oz. Both contracts had declined over the last couple of sessions on elevated monetary policy tightening odds. 

Fed’s dot plot and Warsh’s conference in the spotlight 

The Federal Open Market Committee (FOMC) is expected to raise the federal funds rate by 25 basis points. It would be the central bank’s first hike since July 2023, and the first move of any kind on monetary policy since a quarter-point rate cut in December last year. Higher rate environments tend to weigh on non-yielding assets such as gold. They also tend to strengthen the dollar, which in turn can make bullion more expensive for foreign buyers.

Coming into Wednesday’s Fed decision, rate hike expectations had been steadily building, partly on the back of U.S. economic data that pointed to resilient growth, a strong labor market, and elevated inflation. The latest reading on the central bank’s preferred inflation gauge, the personal consumption expenditures (PCE) price index, showed a 3.7% Y/Y increase, well above the Fed’s long-term 2% target. In fact, the PCE has remained above the 2% level for 65 straight months.

Perhaps even more so than the economic data and a resurgence in oil prices amid a widening conflict in the Middle East, the U.S. bond market has played the biggest part in boosting rate hike expectations. Bonds, especially longer-term maturities, have been gripped in a relentless sell-off roughly since the Fed’s July meeting, leading to a surge in Treasury yields to multi-year and multi-decade highs.

The bond rout began when three regional Fed presidents dissented with the FOMC’s move to hold rates steady in July and called for a hike instead, suggesting that fixed-income traders were unhappy with the central bank’s efforts to combat inflation. The rout then picked up steam in August amid spiking oil prices, concerns over the billions of dollars being poured into the artificial intelligence infrastructure buildout, and ballooning U.S. fiscal debt.

On Tuesday, the U.S. 10-year yield, which is used as the benchmark for everything from mortgages to corporate debt to student loans, hit its highest level since April 2007, while the 30-year yield took out a fresh high of over 24 years.

"A hike has largely been priced in. The bond market has already made the call, with the 10-year hitting its highest level since 2007 and oil back above $100, squeezing consumers at the pump and in the grocery aisle. We think the Fed is right to move now rather than wait, as it will be harder to hike in October due to proximity to midterms," Tom Hulick, CEO of Strategy Asset Managers, said. 

The question for precious metal markets now is whether today’s anticipated rate hike would be a "one-and-done" deal or whether it would be the start of a tightening cycle. As per the CME FedWatch tool, market participants expect at least one more quarter-point move this year. Against this backdrop, the Fed’s updated Summary of Economic Projections will be closely watched for the outlook on monetary policy.

Attention is also on Fed Chair Kevin Warsh’s post-decision press conference. Traders will be keen to see whether Warsh will signal any further cues on rates or if he will continue to reject providing forward guidance. Warsh sounded decidedly hawkish in his last public speech at the Jackson Hole conference in August. There is also political pressure on Warsh and the Fed to lower interest rates, most notably from President Donald Trump.

Oil halts surge 

Away from the Fed, gold was supported on Wednesday by oil prices halting their weekly surge. Brent crude futures, the global benchmark, were last down 2.8% to $105.72 a barrel, while U.S. West Texas Intermediate crude futures had fallen 3.1% to $102.55 a barrel. 

The decline came amid an easing in oil supply disruption jitters following a Reuters report that Saudi Arabia was offering more crude oil loadings to Asian refiners through ship-to-ship transfers off Oman’s Sohar port, citing people familiar with the matter. Additionally, the fall in oil was helped by data from the American Petroleum Institute that showed an unexpected build in U.S. crude inventories, ahead of official inventory data later in the day.

Supply disruptions have been the major topic of the week after Saudi Arabia’s critical East-West Pipeline was damaged by drone attacks from Iran-backed Houthis last week. The strikes came amid a widening conflict between Saudi Arabia and the Houthis in a push by the latter to secure greater control over parts of western Yemen and gain leverage over the Bab el-Mandeb Strait, another key shipping corridor in the Gulf.