Gold treads water as potential Fed rate hike looms

Gold prices drifted lower early Wednesday in New York as investors braced for a monetary policy decision from the Federal Reserve later in the session that could ripple through markets.

August gold
GCQ8, -0.10%
fell $1.20, or 0.1%, to $1,298.20 an ounce, after settling below a psychologically significant level at $1,300 on Tuesday on the back of a strengthening dollar.

The ICE U.S. Dollar Index
DXY, -0.03%
a measure of the dollar against a half-dozen major currencies, was flat on Wednesday but up 0.3% thus far this week. A stronger dollar can weigh on demand for assets priced in the currency, making them more expensive to buyers using other monetary units.

A statement from Fed is due at 2 p.m. Eastern Time, a half-hour after gold is set to close on Comex. A news conference with Fed Chairman Jerome Powell is slated for 2:30 p.m.

Check out: 5 challenging questions Fed chief Powell may encounter

According to the Fed-funds futures, market participants are almost certain that policy makers will increase interest rates by a quarter of a percentage point, with the implied probability for such an action currently standing at around 95%. That would mark the second rate hike this year and the seventh increase since the start of the tightening cycle in December of 2015.

Rising rates can diminish the appetite for assets like gold because the commodity doesnt offer a yield, compared against the perceived safety of other assets like government bonds.

A rate hike by itself is unlikely to trigger market volatility. If, indeed, the committee decides to hike, then all eyes are likely to turn to the accompanying statement, the updated economic projections, especially the new dot plot [of interest-rate expectations], as well as Powells press conference, said Charalambos Pissouros, senior market analyst, with JFD Brokers.

The main message we got from the minutes of the latest Fed meeting is that officials are on track for raising interest rates at this meeting, but they may not be in a rush to increase the pace thereafter, even if inflation overshoots their 2% inflation goal over the next few months, he said.

In other Comex-traded metals, July silver
SIN8, +0.26%
added 0.1% to $16.915 an ounce. July copper
HGN8, -0.03%
declined by 0.1% to $3.247 a pound.

Rachel Koning Beals

Rachel Koning Beals is a MarketWatch news editor in Chicago.

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