Gold is consolidating two back-to-back days of losses, with traders repositioning ahead of the Fed event risks.
In doing so, Gold is trying to build on the intraday bounce, as the US Dollar (USD) holds overnight losses, following soft US Goods Trade Balance data for June and a profit-taking pullback from three-month highs.
However, resumption of hostilities in the Middle East fuels a sharp 4% rebound in Oil prices, reigniting inflation concerns and boosting hawkish Fed expectations, which limits the renewed upside in the non-yielding bullion.
US Central Command: carried out precision strikes in Iraq targeting Iran-backed groups planning attacks on US forces and Saudi oil facilities. This followed the IRGC firing multiple ballistic missiles from Iran at US troops in the Middle East and on oil facilities in Saudi Arabia.
Further, Gold traders refrain from creating any fresh positions before the Fed policy announcements, amid growing real risk of the Fed opting for an interest rate hike this week.
Markets are pricing in roughly a 30% chance of a 25-basis-point (bps) Fed rate hike at the July meeting, slightly up from 25% seen over a week ago, according to the CME Group’s FedWatch Tool, while expecting an 80% probability of a hike in September.
Beyond the interest rate decision, the vote split and new Fed Chair Kevin Warsh’s tone during the post-policy meeting will be closely scrutinized for fresh hints on September rate hike prospects.
If policymakers acknowledge persistent inflation, the vote split proves more hawkish than expected, or Warsh explicitly leaves the door open for a rate hike later this year, the US Dollar and Treasury yields could strengthen, putting renewed pressure on non-yielding Gold.
Conversely, if Warsh downplays the inflationary impact of higher energy prices and reiterates that future policy decisions will depend on incoming economic data, markets could scale back September rate hike bets. That would likely weaken the US Dollar, pull Treasury yields lower, and fuel a sustained Gold price recovery.