Gold is trading in a subdued fashion around $4,330 as markets enter a pivotal week dominated by the Federal Reserve's monetary policy decision. The precious metal is under pressure from rising US bond yields and increased expectations that the Fed will raise interest rates at its meeting on Wednesday.
Rate hike expectations surge after hot inflation data
Expectations for a Fed rate hike have climbed sharply following the release of hotter-than-expected US inflation data for August. The Producer Price Index (PPI) showed headline producer inflation accelerating to 5.4% year-on-year, up from 4.8% in July. On the consumer side, month-on-month core inflation grew by 0.3%, faster than both expectations and the previous month's 0.2% reading.
According to the CME FedWatch tool, the probability of the Fed raising rates at this week's meeting has risen to 86.5%, up from 59.5% before the inflation data was released. This shift in expectations has pushed the 10-year US Treasury yield to near 4.99%, its highest level since November 2023. Higher yields on interest-bearing assets reduce the appeal of non-yielding assets such as gold.
Political comments add uncertainty
Over the weekend, US President Donald Trump commented on the upcoming Fed decision, saying he did not know whether policymakers would raise rates. He stated that the US "should be paying the lowest interest rate in the world," regardless of what inflation and economic data indicate. This marks a notable shift from his previous criticism of former Fed Chair Jerome Powell for not cutting rates.
Separately, National Economic Council Director Kevin Hassett said President Trump "will defend the independence of Kevin Warsh above all," irrespective of what the Fed decides on rates. These political signals add another layer of uncertainty to an already closely watched meeting.
Technical outlook: Gold capped below key moving average
On the daily chart, XAU/USD is trading at $4,330.30, holding below the 20-period exponential moving average (EMA) at $4,393.82. This keeps the near-term bias tilted to the bearish side. The Relative Strength Index (RSI) stands at 46, leaning slightly bearish but not yet in oversold territory, suggesting sellers remain in control without having exhausted their momentum.
Immediate resistance sits at the 20-period EMA around $4,393.82. A sustained break above this level would be needed to ease downside pressure and potentially reopen the path toward recent record highs. On the downside, if gold fails to hold the September 2 low at $4,397.86, the metal could extend its decline toward the July 22 high around $4,166.
Key takeaways
- Gold is trading around $4,330 as markets await the Fed's rate decision on Wednesday.
- Rate hike expectations have surged to 86.5% following hotter-than-expected August inflation data.
- The 10-year US Treasury yield is near 4.99%, its highest since November 2023, pressuring gold.
- Technical indicators show gold capped below the 20-period EMA, with the RSI at 46 suggesting bearish bias.
Common questions
How does the Federal Reserve's rate decision affect gold prices?
Gold is a non-yielding asset, meaning it does not pay interest or dividends. When the Fed raises interest rates, yields on bonds and other interest-bearing assets rise, making them more attractive relative to gold. Higher rates also tend to strengthen the US dollar, which typically pushes gold prices lower as the two are inversely correlated.
Why are US Treasury yields important for gold?
US Treasury yields represent the return investors can earn from holding US government debt. When yields rise, the opportunity cost of holding gold increases because investors forgo that interest income. This often leads to selling pressure on gold, especially when yields reach multi-year highs.
For the latest on where gold is trading, check the live gold price.
Conclusion
Gold's near-term direction hinges on the outcome of the Fed's policy meeting. With rate hike expectations running high and bond yields elevated, the precious metal faces headwinds. However, political uncertainty and the potential for a less hawkish-than-expected decision could provide support. Traders will be watching the Fed's statement and press conference closely for clues on the future path of rates.