Gold: heading for $3,600?

• Easing concerns over the Fed’s independence have bolstered the Dollar.
• Fears of high interest rates are weighing on gold.

The US dollar rose after a three-day decline, thanks to growing investor confidence in the Fed’s independence, anticipation of Kevin Warsh’s speech in Sintra, Portugal, and the realisation that the situation in the Middle East must be taken seriously. The US is attempting to de-escalate the conflict and has announced talks, but Iran insists on maintaining control over the Strait of Hormuz. The positions of the two sides remain far apart, heightening geopolitical risks and boosting demand for the greenback as a safe-haven asset.

The US dollar received a boost from the Supreme Court’s ruling that Donald Trump cannot dismiss Lisa Cook from her post at the Fed. Had the situation been different, the White House would have filled the Committee with doves and pushed for a rate cut. Such a scenario would have put pressure on the US dollar due to fears that the Fed might lose its independence. Now that this threat has been removed, it is having a positive impact on the USD index.

The strengthening of the US dollar has created headwinds for gold, pushing it back below $4,000 per ounce. While the fall in oil prices is reducing inflationary risks, the market remains fixated on the possibility of a Fed rate hike and a stronger dollar. 

Precious metals have seen a brief resurgence amid a reduced likelihood of monetary tightening. The probability of monetary tightening in September has fallen over the past week from over 70% to 62%, whilst the likelihood of two federal funds rate hikes in 2026 has dropped from 50% to 38%. Nevertheless, investors’ attention is focused more on the persistence of relatively high interest rates, causing non-yielding gold to lose ground.

The high yields on Treasuries are being sustained by Warsh’s emphasis on the Fed talking less and acting more. The new chair wants the markets to signal to the central bank where rates should be, rather than the central bank dictating to the markets. The Fed’s shift from verbosity to reticence is heightening uncertainty and allowing investors to demand a higher risk premium. This is reflected in debt market rates and the dynamics of Gold.

The bulls believe that gold will prove more resilient to headwinds. The bears are counting on it falling further towards $3,600 before buying interest returns.

The FxPro Analyst Team