On Tuesday (October 6) during Asian trading hours, spot gold experienced a new round of selling after consolidating on Monday, falling to a two-month low and currently trading around $4,120 per ounce. Despite cooling market bets on a Fed rate hike in October, the dollar maintained a bullish tone, continuing to suppress gold demand.

The US dollar maintained its bullish tone, while gold experienced a new round of selling.

Gold consolidated on Monday before experiencing a renewed sell-off in Asian trading on Tuesday, falling to a two-month low. Despite cooling bets on a Fed rate hike in October, the dollar maintained a bullish tone, a key factor weighing on gold prices. The dollar is currently trading near its highest level since April 2025, supported by ongoing geopolitical uncertainty and high US Treasury yields. A stronger dollar makes dollar-denominated gold more expensive for overseas buyers, suppressing demand.

Interest Rate Hike Expectations: Market Pricing Over 85% Probability of Rate Hike Before Year-End

Despite last week's weak non-farm payroll data initially lowering expectations for interest rate hikes, the market still prices in an over 85% probability of another Fed rate hike before the end of the year. Economists at Deutsche Bank believe the weak overall non-farm payroll data hasn't fundamentally changed the broader labor market narrative. They point out that while the overall non-farm payroll data was disappointing, the broader labor market picture remains relatively resilient, especially when combined with recent ADP and initial jobless claims data. Based on this, the bank continues to expect two more 25-basis-point rate hikes by the Fed in the coming quarters. From a market pricing perspective, Deutsche Bank notes that the market is pricing in an 86-basis-point rate hike over the next 12 months, lower than the 100-basis-point estimate earlier last week, but higher than the 70-basis-point estimate shortly after the non-farm payroll data release. This change indicates that while rate hike expectations have cooled somewhat, the market remains firmly biased towards further tightening.

Geopolitical risks: Houthi attacks and potential Israeli strikes against Iran

Persistent geopolitical uncertainty provided safe-haven buying for the US dollar. The Houthi rebels in Yemen claimed to have launched three military operations using ballistic missiles, cruise missiles, and drones against Saudi Arabian airports, oil facilities, and military bases. The Saudi-led coalition stated it had destroyed a ballistic missile launch platform in the capital Sana'a and a storage facility in the Saada mountains. Furthermore, media reports that Israel is preparing a potential attack on Iran, possibly coordinated with the US or carried out independently, exacerbated the risk of further escalation of tensions in the Middle East. These geopolitical risks provided safe-haven buying for the US dollar, indirectly putting downward pressure on gold.

French fiscal shock: Fixed income market sell-off, US Treasury yields remain high

The deepening fiscal shock in France has led to a sustained sell-off in the fixed-income market, keeping US Treasury yields near multi-year highs and providing additional support for the US dollar. This transmission chain is key to understanding current gold pricing: the French fiscal crisis triggered a global bond market sell-off, pushing up US Treasury yields, which in turn supported the dollar and ultimately suppressed gold. This channel means that even if expectations of a Fed rate hike cool, as long as global fiscal risks persist, US Treasury yields are likely to remain high, and the upside potential for gold will continue to be limited.

Summarize

Gold is currently caught in a tug-of-war between a strong dollar and cooling expectations of interest rate hikes, but the dollar and yields still hold the upper hand. The dollar remains near its highest level since April 2025, supported by geopolitical uncertainty and high US Treasury yields. The market is still pricing in a greater than 85% probability of a Fed rate hike before the end of the year, and Deutsche Bank continues to expect two more rate hikes in the coming quarters. Houthi attacks on Saudi targets and Israel's potential preparations to strike Iran have provided safe-haven buying for the dollar. The French fiscal shock has pushed up US Treasury yields, further supporting the dollar. The FOMC meeting minutes and speeches by Fed officials will be the core catalysts determining the short-term direction of gold. (Spot gold daily chart, source: FX678) At 13:48 Beijing time, spot gold was trading at $4122.22 per ounce.