Gold expected to trade range-bound despite increasing bets of a Fed rate pause

Gold prices continue to draw support from expectations that the Federal Reserve (Fed) will hold interest rates steady through the remainder of the year after softer US inflation and employment data. 

However, while money managers have aggressively built long exposure, energy price volatility originating from tensions in the Middle East presents a key capping risk. With potential Oil price spikes threatening to reignite inflation and reshape Fed rate expectations, the precious metal is likely to remain locked in a defined trading range.

Fed pause expectations and soft USD boost speculative long positioning

According to TD Securities strategists, speculation that the Fed will refrain from further rate increases this year has provided a strong tailwind for precious metals. A combination of modest inflation metrics, lackluster employment data and short-end yield stabilization appears to have convinced speculative traders that the US Dollar is on a downward path. 

Consequently, asset managers have heavily built out long Gold positions, though a subset of traders maintain downside hedges against unexpected Oil-driven rate shocks.

Traders are hypothesizing that the Fed will not pull the trigger on rate hikes this year, which has subdued interest rates on the short end of the curve and convinced specs that the USD is headed lower.

Middle East energy risks cap near-term upside for Gold

TD Securities also points out that while political concerns and labor market soft spots bolster the Fed pause narrative, near-term price gains for Gold will likely remain constrained. Ongoing hostilities in the Persian Gulf keep energy supply lines vulnerable. Should an Oil price surge trigger renewed inflation concerns, the bar for the Fed to re-evaluate its rate path remains low, forcing traders to adjust policy pricing upward.

Such a development [an oil price surge] would likely force gold traders to reprice policy expectations to reflect higher Fed funds rates this year and next.

Strategists project Gold to trade range-bound

TD Securities projects a consolidated holding pattern for Gold in the near to medium term. The risk of higher interest rates driven by energy market uncertainty is expected to anchor the precious metal within a $4,200–$4,500/oz corridor into early 2027. However, once inflation pressure subsides, the metal is poised to break out toward higher levels later in 2027.

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)