Gold: The Fed will lead the way

The US Dollar has retreated as traders square positions ahead of the FOMC meeting results announcement. The futures market puts the odds of a Fed rate hike at 1 in 3 following the 28–29 July meeting. There is a high risk of a surprise from the Fed, so speculators are unwinding some of their record net long positions in the greenback, the highest since 2015.

Data points to rates being held steady: June employment figures cooled after strong spring growth, and inflation has slowed. Furthermore, several FOMC officials have stated that monetary policy is in the right place, and Kevin Warsh gave no indication of tightening in his testimony before Congress.

Conversely, advocates of monetary tightening argue that the start of a tightening cycle signals the Fed’s readiness to deploy all its resources to ensure inflation returns to the 2% target, as Kevin Warsh has repeatedly stated. Without a 25-basis-point rise in July, the Fed may need to hike by 50 basis points in September. At the same time, the new Fed Chair could demonstrate his independence and the central bank's independence from White House directives.

The Fed’s decision is of paramount importance for gold. The precious metal is under pressure and is unlikely to stray far from the $4,000-per-ounce mark, as the futures market anticipates two rounds of Fed rate hikes in 2026. In this regard, even if rates remain at their current level, hawkish rhetoric could have dire consequences for gold.

On the other hand, the US dollar risks weakening significantly if the Fed does not adjust its monetary policy and there are no more than two dissenting votes. This is the view of TD Securities, which forecasts that the presidents of the Cleveland and Dallas Feds, Beth Hammack and Lori Logan, will vote in favour of a rate hike. In this scenario, gold could head towards $4,150 and beyond.

The precious metal has reacted calmly to the rise in oil prices caused by Iran’s unexpected strikes on US bases in Jordan and to Hong Kong’s increase in gold bar imports to their highest level since late 2014. This points to strong demand from mainland China. However, history shows that when gold flows from West to East, i.e., from ETFs to Asian consumers, a downward trend in gold prices is the most common outcome. 

Summary: Gold’s path hinges on the Fed: hawkish signals could pressure prices, while steady rates and limited dissent may weaken the dollar and lift Gold.