Gold slips as dollar firms on Fed rate hike bets, losses capped by slide in oil

Gold prices dipped on Monday amid a rise in the dollar which took the greenback to a nearly eight-week high. Losses in the yellow metal were capped by a decline in oil prices sparked by Middle East diplomacy hopes and easing supply concerns.

Spot gold shed 0.8% to settle at $4,343.73/oz, while gold futures lost 1% to settle at $4,381.00/oz.
Hawkish Fed remains in the spotlight
Precious metal market participants on Monday were still digesting last week’s big event – the Federal Reserve’s latest rate decision.

“The plain fact is that inflation is too high and has been for too long,” Fed Chair Kevin Warsh told reporters after the Federal Open Market Committee (FOMC) unanimously voted to raise the federal funds rate to 3.75%-4.00% from 3.50%-3.75%. Higher rate environments tend to weigh on non-yielding assets such as gold. They also tend to strengthen the dollar, which in turn can make bullion more expensive for foreign buyers.

Moreover, the Fed’s updated Summary of Economic Projections had showed that at least 12 members of the FOMC saw one more rate hike this year.

Odds of the Fed rate hike had surged to 90% ahead of the FOMC’s decision, boosted by spiking oil prices, U.S. economic data, and a relentless rout in the bond market. Fixed-income investors in particular cheered the rate hike as evidence that the Fed was not falling behind the inflation curve.
Central bank rate hikes have been the big headline of this month following similar moves from the European Central Bank (ECB) and the Bank of Japan (BoJ), with both citing energy-driven price pressures.

“Central bank tightening kicked into high gear this week as the Fed delivered its first hike in over three years and signaled more to come. September moves from the ECB, Fed, and BoJ were widely anticipated, but delivered a significant signal about shifting perceptions of risk,” JPMorgan analysts led by Bruce Kasman said on Saturday.

“We have been highlighting three components of this shift: 1) growing impatience with persistent inflation, 2) building confidence in the resilience of the expansion, and 3) increasing recognition that policy stances are less restrictive than initially thought,” they said.

“The commonality reflected in the latest guidance underscores the growing power of global forces driving growth, inflation, and financial conditions. With incoming data reinforcing this message, the path ahead is relatively clear: absent a disruptive shock related to energy or financial markets, a material and synchronized global policy adjustment is coming,” they added.

Oil slips
Turning to the Middle East, oil prices dipped on Monday, with Brent crude futures, the global benchmark, briefly falling below the $100 a barrel mark. They eventually slipped 3.2% to settle at $100.14 a barrel.

The decline came amid an easing of oil supply disruption fears, after a positive update from U.S. Central Command. Admiral Brad Cooper on Saturday said CENTCOM forces had supported the transfer of more than 1 billion barrels of crude oil through the Strait of Hormuz in the last couple of months.

“Clearly, momentum is building,” the CENTCOM Commander said, adding that the volume of crude oil, cargo, and liquid natural gas in the past two weeks through the strait was “higher than at any point in the past six months.”

The comments weighed on oil prices, even as traders remained on edge about a widening conflict between Saudi Arabia and Iran-backed Houthis in Yemen. Fighting between the two reportedly intensified over the weekend, as the Houthis pushed to gain leverage over the Bab el-Mandeb Strait, another critical shipping corridor linking the Gulf of Aden to the Red Sea and used by Saudi Arabia as an alternative transit route for its oil exports.

The continued shutdown of the vital East-West Pipeline in Saudi Arabia was a big topic of discussion last week, but jitters from the closure were dissipated after the kingdom took steps to make up for the loss by ramping up east coast exports and allowing ship-to-ship transfers off the coast of Oman. Data from shipping analytics firm Kpler showed that Saudi oil exports had bounced back to a little over 4 million barrels per day so far in September, up from a 2.4 million bpd in August.

Oil prices on Monday also fell amid hopes for diplomatic progress between Washington and Tehran at this week’s United Nations General Assembly meeting, where a delegation from Iran, including the country’s foreign minister and president, were expected to attend. Media reports said Trump was “open” to speaking with Masoud Pezeshkian, Iran’s president.

Traders were also hoping that there could be some talks over Iran between Chinese President Xi Jinping and Trump, as the Asian nation is the biggest buyer of Iranian crude. China’s foreign ministry confirmed Xi’s visit to the U.S. on Monday, with spokesperson Guo Jiakun telling reporters that Xi and Trump will have an “in-depth exchange of views” on “major issues concerning bilateral ties and world peace and development.”