Gold prices fell on Tuesday as the US dollar remained firm ahead of the Federal Reserve’s policy decision, with investors weighing the possibility of further interest rate increases amid persistent inflation concerns.
Spot gold declined 0.5% and was trading at $4,002.32 an ounce by 0740 GMT.
Bullion had suffered its steepest weekly decline in about four months last week, losing around 4%, before recovering some ground during Monday’s session.
The metal has struggled to regain momentum as higher energy prices have reinforced concerns about inflation and the possibility that borrowing costs could remain elevated for longer.
Dollar strength weighs on gold
The US dollar held near a two-week high on Tuesday, reducing the appeal of dollar-priced bullion for buyers using other currencies.
The greenback also drew support from weakness in the euro, which slipped to a two-week low amid growing concerns over France’s fiscal outlook and pressure in its government bond market.
A stronger dollar typically weighs on gold by making the metal more expensive for international buyers.
The relationship has become particularly important as investors reassess the outlook for US interest rates and the potential impact of persistently high inflation.
Oil prices also remained elevated after last week’s rally, with Brent crude trading around $115.90 a barrel and US West Texas Intermediate near $101.80 during the Asian session.
Higher energy prices can support gold through inflation-hedging demand, but they can also complicate the metal’s outlook by increasing the likelihood of tighter monetary policy.
That tension has limited bullion’s ability to benefit from inflation concerns.
Fed decision and December rate hike bets in focus
The Federal Reserve’s two-day meeting begins on Tuesday, with its policy decision due Wednesday.
Markets widely expect the central bank to leave interest rates unchanged this week, but investors are looking for guidance on whether another increase could follow before the end of the year.
Traders are pricing in an approximately 11% chance of a rate hike this week and an 82% probability of an increase in December, according to the CME FedWatch Tool.
Investors will also watch Thursday’s US personal consumption expenditures inflation report, the Fed’s preferred measure of inflation, for fresh clues about the policy outlook.
Although gold is often viewed as a hedge against inflation, it does not pay interest.
Higher rates therefore increase the opportunity cost of holding bullion, potentially pushing investors toward yield-bearing assets.
Analyst warns of further downside below $3,900
Gold is currently consolidating after last week’s steep decline, but analysts warn that the metal could face further losses if key support levels fail to hold.
“We’re seeing gold basically digest within Friday’s range (after) the big drop last week,” Ilya Spivak, head of global macro at Tastylive, told Reuters.
“If we can get a break through $3,900, we’re in for a pretty significant further decline, maybe to test the $3,800 area.”
The outlook for gold will depend heavily on the Fed’s messaging, upcoming inflation data and movements in the dollar and oil markets.
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