Gold jumped more than 1.2% intraday to $4,345 ahead of the FOMC meeting, reversing three weeks of dollar-driven losses. The metal's path now hinges on whether the Fed signals one more rate rise this year or three, with the medium-term outlook still seen as bullish.
Gold rebounds as the dollar retreats
Gold gained more than 1.2% intraday to $4,345 heading into the FOMC meeting. Over the prior three weeks, a strengthening dollar and rising Treasury yields had weighed on the non-interest-bearing metal. But gold launched a counter-attack as soon as the greenback retreated.
The Fed decision is the swing factor
A rise in the federal funds rate from 3.75% to 4% looks like a foregone conclusion, according to the interest rate futures market's base case, which also points to the FOMC signaling it is prepared to tighten again in 2026. That scenario would stabilize the dollar and likely suppress long-term bond yields as fears about the Fed losing control subside — a favorable setup for gold. However, if the committee's updated projections point to three rate rises instead, the dollar would surge and gold would face a wave of sell-offs.
Former Fed Chair Jerome Powell was adept at smoothing market sentiment around FOMC forecasts. Whether Kevin Warsh, an opponent of forward guidance, can do the same remains an open question. His hawkish rhetoric after the June meeting and at Jackson Hole significantly strengthened the dollar and triggered a decline in gold prices at the end of last month, giving gold bulls reason for concern again this time.
Medium-term outlook stays bullish
Even so, the medium- and long-term outlook for gold looks positive. A rate hike is likely to provoke discontent in the White House, whose pressure on the Fed is fueling the "debasement trade." US fiscal problems have not gone away, and the Treasury's attempts to intervene in currency and debt markets are increasing demand for decentralized finance assets. Against that backdrop, a drop in gold prices in reaction to the Fed's decision to start a cycle of rate rises could create ideal conditions for buying the metal.
Source: ActionForex
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