The Fed’s decision today will be crucial in shaping the near-term performance of the US dollar and gold. While a 25 bps cut could provide stability, a 50 bps cut would likely weaken the dollar further and push gold prices higher.
Gold, which is priced in dollars, typically benefits from a weaker US dollar.
When the Fed cuts rates, the opportunity cost of holding non-yielding assets like gold decreases, making it a more attractive option for investors.
"As the opportunity cost of holding gold decreases, we may see increased demand for gold-backed ETFs from asset managers, especially in the West," said Ole Hansen, head of commodity strategy at Saxo Bank.
An overwhelming majority in the market has priced in a 50 basis point cut today.
If Jerome Powell decides to go for a lesser rate cut, there could be a dip in gold prices.
“While we see some tactical downside to gold prices under our economists’ base case of a 25-basis-point Fed cut on Wednesday, we expect a gradual boost to ETF holdings — and thus gold prices — from the Fed’s easing cycle,” analysts told Bloomberg. “Since ETF holdings only increase gradually as the Fed cuts, this upside is not yet fully priced in,” they added
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