Gold prices rose nearly 0.50% after the Federal Reserve cut rates by 25 basis points, which was expected. The decision came from a split vote of 9 to 3, highlighting some uncertainty in policy. Gold (XAU/USD) was trading at $4,227, up from a daily low of $4,182. The Fed’s monetary policy statement discussed risks to employment and ongoing inflation pressures. US Treasury yields fell, with the 10-year note rate dropping to 4.155%, while real yields in the US decreased to 1.895%, providing support for gold. The US Dollar Index fell by 0.58% to 98.65, which also affected gold prices.

Jerome Powell’s Remarks

Fed Chair Jerome Powell remarked that the Fed is “well positioned” to monitor the economy after easing rates by 75 basis points this year. He noted that the Fed funds rate is currently within the neutral range and expects it to be around 3.4% next year. Policymakers predict neutral rates to be about 3% after 2028. Gold has always been seen as a safe haven and a store of value. Central banks bought 1,136 tonnes of gold, worth approximately $70 billion, in 2022. Gold prices usually rise when the US Dollar and Treasury yields fall, particularly during fears of recession or geopolitical issues. Since gold doesn’t yield interest, it thrives when rates are low but struggles with high rates. Although the Fed’s decision to cut rates was expected, the 9-3 split vote indicates significant uncertainty. This division highlights concerns about job market weakness versus ongoing inflation, with the latest CPI report showing inflation at 3.2%. With job growth slowing to just 95,000, the Fed is facing a tough situation. Currently, the trend for gold seems upward. Falling Treasury yields and a weaker dollar create favorable conditions. The 10-year yield at 4.155% makes gold, which doesn’t yield interest, more appealing. We view this as a chance to consider near-term call options on gold, expecting the market to focus more on recession risks than on inflation.

Market Hedge Considerations

However, we should prepare for a potential reversal if the Fed hawks regain control. The statement’s focus on high inflation serves as a warning that a sudden spike in inflation could undo this week’s rate cut. Cautious traders might want to buy put options with a strike price below $4,200 to protect against this risk. Given the divided policy board and neutral outlook, we anticipate considerable volatility in the coming weeks. Chairman Powell’s “wait and see” approach suggests that each new economic report could lead to sharp market swings. This situation calls for strategies like straddles, which can benefit from large price movements in either direction, rather than making strong directional bets. Looking back at the market fluctuations of 2023 and 2024 shows how quickly sentiment can change based on central bank signals. The current environment feels similar, indicating that positions should be managed carefully. The split vote signals low predictability, prompting traders to adjust their risk strategies accordingly. Create your live VT Markets account and start trading now.

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