Gold is currently trading around $4,290 an ounce, having previously fallen over 1% to a five-week low. This decline is largely attributed to increasing disruptions in Middle Eastern oil flows, which are driving up energy prices and consequently stoking inflation concerns. These developments have heightened market expectations that the Federal Reserve will implement its first interest rate increase in three years as early as this week.
Traders are now pricing in a 92% probability of a rate hike by the Federal Reserve during its upcoming meeting. Higher borrowing costs typically exert negative pressure on gold, as it is a non-yielding asset. The prospects of tighter monetary policy, driven by persistent inflation and elevated energy costs, are creating a challenging environment for the precious metal.
This sentiment is reinforced by recent inflation data, with the Consumer Price Index rising 0.4% in August, and annual inflation holding at 3.4%. Core CPI also increased by 0.3%, slightly above economists' predictions. The combination of these inflation figures and surging oil prices, with Brent crude above $108 a barrel and WTI above $100, has solidified expectations for more aggressive monetary policy from central banks globally. The Bank of Japan is also anticipated to raise interest rates this week.
