Markets Raise Fed Hike Odds to 33%, Putting Gold's $4,089 Price Range at Risk

• Spot gold rose 0.9% to $4,089.03 per ounce by 0805 GMT Monday as a US-Iran truce pushed Brent crude down 6.5% to $90.45 a barrel. 
• The dollar index held at 101.27 as Fed Chair Kevin Warsh offered no guidance ahead of the July 28-29 meeting. 
• CME FedWatch prices have a 33% chance of a 25 basis point rate hike Wednesday, up from 16% a week earlier, with markets still pricing roughly two additional hikes.
• North American gold ETFs recorded $7.7 billion in first-half outflows, the largest first-half withdrawal since 2013, while COMEX net longs rose 16% to 538 tonnes in June, signaling stronger futures positioning despite ETF selling. 
• A 25 basis point rate hike Wednesday would strengthen the dollar and real yields, putting gold's move above $4,089 at risk.

US-Iran Truce Cuts Oil 6.5%, Supporting Gold Before the Fed Decision

Spot gold gained 0.9% to $4,089.03 per ounce by 0805 GMT Monday after a weekend US-Iran truce pushed Brent crude down 6.5% to $90.45 per barrel. Gold futures for August delivery rose 0.5% to $4,090.80. 

The dollar index held at 101.27 while the US dollar fell 0.2% against the yen, its steepest daily decline since July 10. Monday's gain followed a first half in which North American gold ETFs recorded $7.7 billion in outflows, the largest first-half withdrawal since 2013. Brent crude briefly traded above $100 a barrel during the conflict, raising inflation expectations and increasing the risk of higher interest rates, which typically weigh on gold.

Limited Fed Guidance Raises Rate-Hike Uncertainty as Markets Lift Fed Hike Odds to 33%

Softer-than-expected June inflation initially lowered Fed rate-hike expectations, but the US-Iran conflict pushed Brent crude above $100 a barrel, raising inflation concerns and increasing the chance of tighter monetary policy. Fed Chair Kevin Warsh has offered little forward guidance, forcing markets to reprice the July 28-29 meeting twice in the past month.

 CME FedWatch now prices a 33% chance of a 25 basis point rate hike Wednesday, up from 16% a week earlier. Rabobank's Jane Foley said Warsh's limited guidance and uncertainty over the conflict have increased uncertainty around the Fed decision. Independent analyst Ross Norman said gold's near-term direction depends on whether the US-Iran truce holds and whether the Fed raises rates Wednesday.

67% Hold Probability Keeps Gold in Range, While a 33% Hike Risks a Break Below $4,050 

HSBC's Paul Mackel said he continues to favor the US dollar despite policy uncertainty. A stronger dollar makes gold more expensive for buyers using other currencies, limiting demand and capping further price gains. 

Base case: CME FedWatch assigns a 67% chance that the Fed leaves rates unchanged July 29, keeping gold in the $4,050 to $4,090 per ounce range into the Bank of England meeting. 

Bear case: CME FedWatch assigns a 33% chance of a 25 basis point Fed rate hike July 29, which could lift the dollar and push gold below $4,050 per ounce. 

Wednesday's FOMC statement, dot plot, and updated CME FedWatch probabilities will determine whether markets maintain the current base case or price a higher chance of additional rate hikes.

Higher Rate Expectations Trigger $7.7 Billion in ETF Outflows While Institutional Gold Futures Buying Holds Firm

North American gold ETFs lost $5.5 billion in June and $7.7 billion in the first half, the largest first-half ETF outflow since 2013. Expectations for higher interest rates pushed real yields and the US dollar higher, increasing the opportunity cost of holding gold and reducing North American ETF holdings by 60.5 tonnes over the first half. 

COMEX net longs rose 16% to 538 tonnes in June, the highest month-end level since January, while smaller traders reduced positions, showing stronger institutional demand than retail participation. Wednesday's Fed decision and the durability of the US-Iran truce will determine whether current gold positioning holds. Smaller futures traders have followed recent price moves rather than leading them since mid-March.

33% Fed Hike Odds Anchor Gold Near $4,089, Until Wednesday Breaks the Range

Gold traded near $4,089.03 per ounce as CME FedWatch priced a 33% chance of a Fed rate hike and Brent crude remained below $100 a barrel. A stable US dollar at 101.27 has limited additional pressure on gold by avoiding a stronger rise in its cost for overseas buyers. 

A 25 basis point Fed rate hike would likely strengthen the US dollar and increase pressure on gold prices. It would reinforce market expectations for additional rate hikes, lifting real yields and the US dollar while increasing pressure on gold and ETF demand. Markets will watch updated CME FedWatch probabilities after Wednesday's Fed decision, followed by the Bank of England and Bank of Japan meetings later in the week. Any meaningful shift in Fed hike expectations after Wednesday's decision will likely drive gold's next move.