Markets Price in 66.4% Probability of 25 bps Fed Rate Hike in September, Weighing on Gold

Futures markets have raised the probability of the US Federal Reserve raising interest rates by 25 basis points at its September meeting to 66.4%, according to market monitoring tools, casting a shadow over gold prices.

This high probability represents double pressure on the yellow metal, as it reduces demand for gold as a hedging tool when interest rates rise, while also strengthening the dollar and pushing up US bond yields.

These expectations run counter to scenarios that were betting on an imminent rate cut, which had been one of the key pillars supporting gold's rally over the past period.

Investors are awaiting upcoming US inflation and employment data to determine whether the Fed will actually proceed with the rate hike, as any downside surprise in inflation could reshuffle the deck and lower the odds of a hike, opening a window for gold to rebound.

What Do These Terms Mean?

Basis Point: A small unit of measurement for interest rates equal to 0.01%, and a 25-basis-point increase means raising interest rates by a quarter of a percentage point.

Interest Rate Futures: Financial instruments traded in the markets that reflect investors' expectations for the path of interest rates, used to calculate the probabilities of central bank decisions.

Hedging Instrument: An asset or investment used to protect against losses in other investments, such as buying gold to protect against falling stocks or currency erosion.