Gold rises, Treasury yields pause ahead of the FOMC rate decision

Gold is rising towards $4,325, recovering from a 5-week low, on Wednesday, but still trades down 3% so far in September as investors react to the rally in oil prices and look cautiously towards today's FOMC rate decision, where the Fed is expected to hike rates for the first time since July 2023.

Oil and yields drag on Gold

Oil prices climbed above $109 this week amid ongoing fears surrounding supply disruption in the Middle East after Saudi Arabia's East-West pipeline, which is used to bypass the Strait of Hormuz, remains out of operation with no immediate signs of a revival. Rising oil prices add to inflationary concerns.

Surging yields are also becoming increasingly important for Gold. The yield on 10-year Treasuries climbed above 5% this week, hitting its highest level in 19 years as soaring energy prices, persistent energy concerns, and heavy government borrowing unnerve the fixed income market.

The 5% level is viewed as a major psychological threshold for the 10-year Treasury. With decent returns from the supposedly risk-free investment, non-yielding assets such as gold lose their shine.

Higher yields have also helped the U.S. dollar recover in trading, which now trades at a two-week high, also weighing on U.S.-denominated commodities such as precious metals.

Whilst gold is typically seen as a hedge against inflation and geopolitical uncertainty, higher yields can overshadow this and reduce its appeal.

What to expect from the Fed

The market is pricing in a 92% probability that the Fed will increase rates by 25 basis points at today's announcement, taking rates to 3.75%–4%. This comes after hotter-than-expected core CPI inflation on Friday. The Fed could also signal further tightening ahead, with the market pricing in a second rate hike before the end of the year.

If the Fed doesn't hike rates, or if Fed Chairman Kevin Warsh signals less monetary tightening in the coming months than markets have priced in, bond investors could push yields even higher to protect against inflation risk, which could weigh on gold.

However, gold could also remain vulnerable if policymakers signal that rates will stay high for longer.

Attention will also be on the dot plot and updated projections for further clues about the Fed’s net moves.

Its also worth paying attention to central bank gold purchases. China has increased purchases in recent months buying 20 tons for the second straight month, accounting for around 10% of quarterly demand from all central banks.

XAU/USD technical analysis

Gold is testing a key support at $4320, the confluence of the 50-and 200-day EMAs and the 23.6% Fibonacci retracement of the $5,598 high and $3,940 low. The RSI is just below 50 indicating only a modest bearish bias.

Sellers will look to break below the key support towards $4,200 and $4,100, the March low. Below here, attention turns to $3,940, the 2026 low.

Should buyers successfully defend the $4320 support, attention will turn to $4,500 and $4,570, the 38.2% Fibonacci retracement.

A rise above $4,700 creates a higher high, turning attention to $4,770, the 50% Fibonacci retracement and the May high.