Despite the significant gains, Gold remains slightly vulnerable to further losses amid geopolitical tensions in the Gulf, inflation concerns fueled by high oil prices, and hawkish bets on the Fed's policy outlook On Monday, “Yemen's Iran-backed militant group, the Houthis, launched new attacks on Saudi Arabia after Riyadh. Gulf Arab states also postponed planned talks with Iran” according to Reuters Rising concerns that the US-Iran squeeze will turn into a full-fledged regional conflict in the Middle East and the resulting spike in oil prices continued to keep the US Dollar (USD) propped near weekly highs against other major currencies. This, in turn, remains a risk to Gold's recovery. Additionally, the 92% probability that the Fed will raise interest rates this week, following some positive surprises in the August inflation report and very strong Nonfarm Payrolls (NFP) data, remains supportive of the recent USD uptrend, with the benchmark 10-year US Treasury yield breaking the key 5% level for the first time since 2023. Strategists at Scotiabank note that recent market dynamics justify the dollar's strong tone ahead of the FOMC meeting, noting that “in recent years, swap prices indicating a 70% or higher risk of a Fed rate move have been a near-perfect indicator of policy moves, so the dollar's rise in response to swap prices is understandable.” However, they warned that “there remain some risks to the outlook,” with the balance of scenarios tilted to how the Fed communicates its next steps. According to them, “an unchanged Fed decision would be a surprise to markets and clearly negative for the USD,” while a “dovish” rate hike “that does not clearly commit to additional measures would also likely weigh on the USD.” Against this backdrop, Scotiabank assesses that “the DXY is currently reasonably priced for current front-end spread conditions,” and argues that “further DXY gains—sustaining above the 100 level—will require support from a significant move in the yield differential,” adding that “it is not currently clear to us that the Fed is prepared to raise rates that far.” However, now all attention is focused on the Fed's views on future interest rate increases, which will be highlighted by the Summary of Economic Projections (SEP), or the so-called Dot Plot, considering that the interest rate increase and the lack of statements by Chairman Kevin Warsh have become a certainty. Meanwhile, developments in the Middle East and position adjustments could drive Gold price action, making this precious metal vulnerable to volatility.

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