The Federal Reserve's higher-for-longer interest rate stance has solidified as markets absorb April's inflation data. The CME FedWatch tool now indicates a 71.5% probability that the Fed will hold rates through the end of 2026, with some analysts suggesting the next move could be a rate increase in early 2027. This combination of strong inflation and restrictive policy is capping gold's upside despite elevated geopolitical risk.
April's PCE data showed headline inflation at 3.8% year-on-year, the fastest since May 2023, driven largely by energy costs from the Iran conflict. Core PCE at 3.3% remains well above the Fed's 2% target. With new Fed Chair Kevin Warsh assuming office on May 16 under pressure from the administration to lower rates, the central bank has justified its position by attributing inflation to external supply shocks rather than domestic policy.
The macro environment creates a tug-of-war for gold. On one hand, higher real yields and a strong dollar are headwinds. On the other, central bank buying, geopolitical risk (Iran war, Russia-Ukraine), and inflation hedging demand provide strong support. Kavout Research notes that gold is underperforming relative to geopolitical headlines because the traditional inverse correlation with the dollar is currently overriding safe-haven demand.