Gold rebounded on Wednesday, ending a two-day slide as positioning shifted ahead of the Federal Reserve’s policy decision and a modest easing in US Treasury yields offered support. XAU/USD was trading around $4,340, up 1.10% on the day, after touching its lowest level in more than a month earlier in the week, though strength in the US Dollar (USD) limited the move. The Dollar Index (DXY) hovered near 99.70, close to two-week highs, while the 10-year Treasury yield stood near 4.97% after reaching 5.04% on Tuesday, its highest since 2007.
The Fed is due to announce policy at 18:00 GMT, with a press conference by Chair Kevin Warsh at 18:30 GMT, and markets are positioned for a 25 basis-point increase to a 3.75%–4.00% federal funds range, which would be the first rise since July 2023. US Retail Sales rose 1.2% month-on-month in August versus a 0.8% forecast, reversing a 0.5% fall in July. Technically, XAU/USD remains below the 200-day SMA near $4,540, with RSI at 48 and MACD still negative; support sits around $4,326 and $4,280, then $4,150 and $4,000, while resistance is seen at $4,540 and then $4,700.
Derivative Trading Strategies and Market Drivers
We suggest derivative traders prepare for heightened volatility in gold options and futures ahead of today’s Federal Reserve decision. With markets pricing in a 25 basis-point hike to 4.00% and the 10-year Treasury yield hovering near 4.97%, short-term straddles could capitalize on sudden price swings. We believe the key driver for gold will not be the rate hike itself, but the Fed’s dot plot and upcoming policy guidance.
Historical Context, Central Bank Demand, and Technical Outlook
Historically, gold performs exceptionally well during periods of energy shocks, similar to the 1970s when geopolitical tensions in the Middle East sent oil prices and gold soaring. Central bank demand also remains a strong pillar of support, as global institutions added a record 1,136 tonnes of gold to their reserves in 2022, followed by another massive 1,037 tonnes in 2023. We think this structural demand will limit the downside for gold, even if the US dollar remains strong near the 99.70 mark.
From a technical perspective, we recommend placing buy orders near the 100-day moving average at $4,326 or the 50-day average at $4,280. If the Fed delivers a hawkish tone, we expect gold to test these support levels, but a break below $4,150 is unlikely unless US retail sales continue their aggressive 1.2% monthly growth. On the upside, derivative traders should target a potential breakout toward the 200-day moving average at $4,540 if the Fed pauses its tightening cycle.
To manage the risk of high borrowing costs, we suggest using bull call spreads rather than outright long positions. This strategy helps mitigate the impact of high interest rates, which typically make non-yielding assets like gold less attractive to hold. By capping our upside targets near the major resistance at $4,700, we can maximize premium efficiency while protecting our capital.
