Gold prices experienced a slight increase on Wednesday, supported by a weakened U.S. dollar, while attention remained on the U.S. interest-rate outlook amid escalating violence in the Middle East. By 05:25, spot gold had risen by 1.0% to $4,397.47 an ounce, while gold futures had inched up by 0.1% to $4,441.86 an ounce. The U.S. dollar index, which measures the performance of the greenback relative to a selection of global currencies, remained largely stable at 98.77. Recent strength in the Japanese yen has been identified by some analysts as a contributing factor to the dollar’s relative weakness over the past week. A softer greenback can enhance gold’s appeal by reducing its cost for international purchasers.

Meanwhile, Iran and the U.S. have engaged in a new series of confrontations in regions across the Middle East, undermining the likelihood of a swift resolution to a six-month-long conflict that has unsettled global financial markets. Brent crude futures, the global oil benchmark, have once again surpassed $100 a barrel, highlighting concerns regarding persistent energy supply shortages in the Strait of Hormuz, a crucial waterway located off Iran’s southern coast. The renewed ascent in oil prices poses a risk of intensifying worries regarding energy-induced inflation as we approach a new series of central bank interest rate determinations in the near future.

Markets are currently estimating a probability of approximately 60% that the Federal Reserve will choose to increase rates by 25 basis points next Wednesday, an increase from the 40% likelihood observed a week prior. Policymakers have indicated a preference for addressing inflationary pressures, while emerging signs of resilience in the labour market seem to strengthen the argument for an increase in borrowing costs. In theory, increasing interest rates can suppress inflation, although this comes with the potential downside of impacting employment and broader economic expansion. For gold, elevated interest rates can diminish demand by raising the opportunity cost of maintaining the non-yielding asset.

Rick Kanda said “Gold has recently come under increased pressure following a change in expectations around U.S. interest rates.” The metal surged nearly 10% in August, notching its best monthly gain since January. Kanda suggested that “[w]hen gold rises this quickly, some investors may sell to lock in profits, particularly if economic data strengthens the case for higher interest rates.” Still, he said there is the possibility of gold moving back towards a late-August peak of $4,685 an ounce, but flagged that he expects “considerable fluctuations along the way.” And “Investors should also be prepared for prices to potentially fall towards the low-$4,000s if rate-hike expectations continue to rise,” Kanda said.