- Gold extended its decline but remains above key $4,000 support
- Hawkish Fed expectations and a stronger US dollar add pressure
- Dovish Fed could lift gold to $4,200; But break higher is needed for a reversal
- A hawkish outcome may prompt traders to dive below $4,000
Although opened with a positive gap on Monday amid headlines about a pause in US-Iran hostilities, it ended the day lower, extending its slide today. That said, the metal remains above the prior downtrend line drawn from the high of March 2, and above the psychological round zone of $4,000.
The metal surrendered against a strong once again, which may have benefited amid speculation of a hawkish Fed on Wednesday. Although US President Trump said on Monday that the US was having “good talks” with Iran and that there was a chance of a deal to resolve the conflict, the renewed hostilities in July pushed up as much as 40% – before the latest pullback – which implies upside risks to the July prints.
With that in mind, investors are already assigning a decent 35% chance of a at this gathering. A 25bps reduction is fully priced in for September, while another one is expected for March.
Even if the Fed does not act at this gathering, any hints corroborating the notion that they could do so in September are likely to add further fuel to the dollar’s engines as Treasury yields could drift higher. At the same time, gold may come under renewed pressure as the opportunity cost for holding the metal increases.
That said, the bar for matching such hawkish expectations may be very high and thus, some investors may not get the outcome they desire. Any disappointment could allow the metal to bounce from the $4,000 mark and aim for the $4,200 zone. Nonetheless, a convincing break above that zone may be needed for a bullish trend reversal to start being examined. Such a move may pave the way towards the $4,345 resistance territory.
Now, in the case that gold falls and closes below $4,000 after the Fed decision, the bears could put the $3,715 zone under the microscope.
