An aggressive fed: a double blow to markets

XAU/USD

Key zone: 3,950.00 - 4,080.00

Buy: 4,100.00 (on strong positive fundamentals); target 4,350.00; StopLoss 4,030.00

Sell: 3,900.00 (on a pullback after retesting 4,000); target 3,650.00; StopLoss 3,970.00

The Fed's decision to leave interest rates unchanged on October 28 is almost fully priced into market expectations. However, the decision itself is only the first test of investor sentiment. On October 29, the release of U.S. GDP and PCE inflation data could change forecasts for the December meeting and trigger another wave of asset repricing.

Institutional investors are preparing not so much for the Fed's decision itself as for a potential reassessment of the future path of interest rates.

What matters to markets is the difference between the Fed's expected and actual policy. That gap determines how the dollar, bonds, and gold react.

A quick recap:

According to CME FedWatch, the probability of keeping the federal funds rate at 3.75–4.00% at the October 28 meeting was estimated at approximately 88%, while the probability of a 25-basis-point hike stood at 12%. Therefore, an unchanged rate decision will not be a positive surprise for the market.

The Fed will announce its decision before the release of two important macroeconomic indicators that could influence expectations for December's interest rate decision. If Warsh emphasizes the need to continue fighting inflation but provides no clear guidance on the timing and scale of further action, the market reaction could be muted. Hawkish rhetoric will not necessarily trigger another selloff if investors have already priced in that scenario.

Bond market performance confirms that a significant portion of expectations for restrictive monetary policy is already reflected in prices. In October, the yield on 10-year U.S. Treasuries climbed to 5.31%, but by October 26 it had fallen to approximately 4.99%.

Following its historic rally, gold remains vulnerable to further correction.

Prices are declining against a backdrop of relatively stable open interest and falling trading volumes, according to available CFTC data. Even if geopolitical tensions persist, gold could continue to fall if investors anticipate an extended period of high interest rates. Conversely, a dovish shift in monetary policy expectations could trigger a sharp rebound after the correction.

What Matters Right Now?

• Real bond yields. If the Fed confirms its willingness to maintain restrictive conditions and real interest rates continue to rise, gold's recovery potential will remain limited.
• Dollar performance. A stronger DXY increases the cost of gold for investors using other currencies and generally puts additional pressure on prices. However, during periods of instability, the dollar and gold can appreciate simultaneously.
• The nature of inflation. An acceleration in PCE inflation will not necessarily support gold. If the market interprets rising prices as justification for additional rate hikes, the initial reaction in XAU/USD could be negative.

Traders should track the sequence of market signals rather than attempt to predict the direction of every instrument in advance.

• Before the Fed meeting: establish baseline expectations for the December rate decision and monitor UST 2Y and 10Y yields, the DXY index, and TIPS real yields.
• After the decision: compare changes in December rate expectations with the reactions of the dollar, bonds, and gold. A rise in DXY without a comparable move in short-term yields will require confirmation from other indicators.
• During the press conference: assess comments on inflation trends, labor market conditions, and the requirements for raising interest rates. Divergences between the market's initial reaction and price movements following the Fed Chair's answers are particularly important.
• Account for position correlations: buying the dollar, selling gold, and taking a short position in Bitcoin may all reflect the same macroeconomic hypothesis.

So What Is the Outcome?

In the short term, the outlook for gold remains neutral to negative, although a reassessment of expectations for December's rate decision could trigger a sharp recovery. Over the medium term, the technical structure remains bearish until XAU/USD moves back above the $4,120–4,260 zone. Long-term upside potential remains intact.

The key support area is around $4,000. Holding this level and reclaiming $4,030 would create conditions for a test of resistance at $4,075 and $4,120–4,135. Conversely, a sustained break below $3,975 would increase the risk of a continued correction toward $3,950–3,930 and, if selling pressure persists, $3,900.

Even an unexpectedly high PCE reading does not guarantee a decline in gold. If economic growth expectations deteriorate at the same time and real interest rates begin to fall, demand for safe-haven assets could outweigh inflation concerns.

So we act wisely and avoid unnecessary risks.

Profits to y’all!