On Wednesday (September 16) during the European session, spot gold fluctuated higher, currently trading around $4330 per ounce. The Federal Reserve is expected to raise interest rates by 25 basis points at this meeting, with market focus shifting to updated economic projections (including the dot plot) and Chairman Kevin Warsh's press conference. Energy-driven inflation risks support expectations of further Fed tightening, while a global bond sell-off pushed the 10-year US Treasury yield above 5%, reaching its highest level since 2007. Escalating tensions in the Middle East supported the safe-haven dollar; these factors may limit gold's gains.

Fed Decision Preview: 25 Basis Point Rate Hike, Focus on Dot Plot and Warsh's Remarks

The Federal Reserve is expected to announce a 25 basis point interest rate hike at the conclusion of its monetary policy meeting on September 15-16, raising the target range for the federal funds rate accordingly. Since the rate hike itself has largely been priced in by the market, the real focus has quickly shifted to the Fed's concurrently updated summary of economic projections, especially the highly anticipated "dot plot." The dot plot will visually demonstrate each member's individual expectations for the future path of interest rates, including their views on the remaining meetings this year and the longer-term neutral interest rate, thus providing the market with crucial clues as to whether the tightening cycle will continue. Meanwhile, investors will scrutinize Chairman Kevin Warsh's wording, tone, and assessments of inflation, employment, and growth at the post-meeting press conference. Any hawkish stance could strengthen the dollar, while a more cautious signal could trigger a dollar pullback. This policy outlook will not only play a key guiding role in the near-term dynamics of the dollar but will also provide new directional momentum for gold, a non-interest-bearing asset: if the dollar strengthens due to hawkish expectations, gold prices may come under pressure; conversely, they may find support.

Suppressive factors: energy inflation, global bond sell-off, and Middle East tensions

Energy-driven inflation risks support the prospect of further tightening by the Federal Reserve. Oil prices rose to their highest level since May 20th on Tuesday due to concerns about Middle East supply disruptions. A surge in public and corporate borrowing led to a continued global bond sell-off, pushing the benchmark 10-year US Treasury yield above the 5% threshold for the first time since 2023 and its highest level since 2007. Escalating tensions in the Middle East should continue to support the safe-haven dollar, which could limit gold prices. In recent developments, Saudi Arabia issued a security alert for several areas, including the holy city of Mecca and the second-largest city of Jeddah, following a week of attacks by the Iranian-backed Houthi rebels in Yemen. The Saudi-led coalition pledged a “resolute” response to Houthi missile and drone attacks, exacerbating the risk of further escalation of the regional conflict. Furthermore, the US Central Command stated that 103 merchant ships have been diverted as part of a blockade of Iranian maritime trade through the Strait of Hormuz, supporting oil prices and benefiting the dollar.

Institutional Views

Goldman Sachs has set a year-end target price of $4,900 per ounce for spot gold, citing net upside risks but also increased volatility along the path. The bank notes that the $4,900 fair value forecast is based on the assumption of continued strong demand from central banks. If gold ETF inflows resume and current high call option positions persist, hedging activity could mechanically amplify the rally, pushing gold prices far above forecast levels. Conversely, renewed expectations of a Fed rate hike could trigger hedging by traders, leading to a more pronounced pullback than usual. Goldman Sachs emphasizes that despite increased short-term volatility, structural support factors, including central bank gold purchases, remain. Manpreet Gill, Chief Investment Officer for Africa, the Middle East, and Europe at Standard Chartered Bank, suggests gold may have entered a new upward trend, potentially reaching near $5,000 per ounce in the next 6 to 12 months. Gill points out that continued central bank gold purchases are the core driver; while buying may fluctuate, central banks tend to be more aggressive during price corrections rather than chasing highs. Meanwhile, a weaker dollar and a steeper yield curve for US Treasury bonds will also provide additional support. (Spot gold daily chart, source: EasyTrade) At 15:26 Beijing time, spot gold was trading at $4333.52 per ounce.