Gold prices have been trading flat around $5,000 since Monday's trading as market players took precautionary measures ahead of the Fed's FOMC interest rate decision early tomorrow morning.
At 9 am, gold prices were at $5,007, stable since they opened early Wednesday in Asian trading.
The conflict in the Middle East continues to escalate with no sign of a resolution in the near future. Iran is now facing continued pressure after Israel reportedly succeeded in assassinating its top security figure, Ali Larijani.
At the same time, tensions have widened to the Gulf region when Tehran is said to have attacked energy interests in the United Arab Emirates, including an incident involving natural gas facilities. This situation increases the risk of global energy supply disruptions.
US President Donald Trump has warned that an attack could be extended to Kharg Island, Iran's main oil export hub. If it happens, it could potentially trigger a major shock in the world oil market.
This growing geopolitical tension is seen supporting demand for safe-haven assets such as gold. However, the surge in crude oil prices has also raised concerns about higher global inflation.
This inflationary pressure has directly changed expectations for US monetary policy. The market now expects Goldman Sachs to see interest rate cuts only in September and December, compared to its initial expectation of June.
The persistently high interest rate environment has a negative impact on gold as the metal does not offer returns. When interest rates are high, investors tend to shift to yielding assets such as bonds or the dollar.
In terms of monetary policy developments, the Fed is expected to maintain interest rates in the range of 3.50% to 3.75% at its March meeting. The market's main focus is now on the statement from its Chairman, Jerome Powell.
Any aggressive tone from Powell has the potential to strengthen the US dollar, thus putting pressure on the prices of commodities traded in dollar denominations in the near term.
