Federal Reserve rate cut expectations collapse, gold affected with a sharp correction of over $23

After the government shutdown turmoil subsided, the financial markets experienced a sharp adjustment. Spot gold closed lower on Thursday, dropping $23.90 to $4,171.36 per ounce, after reaching a three-week high of $4,244.94 during the session, followed by a significant sell-off that completely reversed its upward momentum. This large decline in gold reflects a fundamental shift in market expectations regarding Federal Reserve policy.

Change in Rate Cut Expectations, Market Confidence Shifts

Latest market trading data shows that the probability of the Fed implementing a 25 bps rate cut in December has fallen below 50%, a significant drop from 62.9% the previous day. This sudden change has become the main force shaking gold.

According to judgments from multiple traders and analysts, the shift in Fed officials’ stance is a key factor. Although early in the year the market widely expected weak employment data after the government shutdown was resolved, prompting continued easing by the Fed, more and more Fed decision-makers are emphasizing a cautious stance. San Francisco Fed President Daly recently stated that after two rate cuts, the current rate has achieved a balance between two major objectives, and the December decision remains open. Cleveland Fed President Harker explicitly said that monetary policy should be maintained at a level sufficient to contain inflation, which is essentially opposed to further easing. St. Louis Fed President Bullard further pointed out that continued easing could over-stimulate the economy, and current rates are closer to the neutral zone.

Fed Chair Powell last month said that a December rate cut is “far from a done deal,” a statement that initially boosted the dollar. Although the momentum has since weakened, it laid the groundwork for a reversal in market expectations.

Stocks and Bonds Fall Together, Safe-Haven Demand Diminishes

The simultaneous sharp decline in gold was also reflected in the stock market. The three major US indices experienced their worst single-day performance since October 10: the Dow plunged 797.6 points, down 1.65%; the S&P 500 fell 1.66%; and the Nasdaq tumbled 2.29%. Concerns over the interest rate path directly translated into reevaluation of stock valuations.

Improvement in trade environment also became a key variable. Progress in the US-China trade truce made risk assets more attractive, leading to a withdrawal of safe-haven funds. Independent metals trader Tai Wong admitted that gold, stocks, bonds, the US dollar, and even cryptocurrencies all experienced broad sell-offs. This is a typical “buy the rumor, sell the news” phenomenon—initial optimism from government reopening stimuli, followed by reality-based negative expectations.

Economic Data Gaps Persist, Market Volatility May Continue

Juan Perez, head of trading at Monex USA in Washington, reminded that although the government shutdown has ended, key economic data from September and October have yet to be fully released. This statistical vacuum will continue to weigh on market pricing. The market needs reliable data for accurate analysis, but currently, all of this remains unknown. Analysts expect that until economic data is gradually completed and published, high market volatility will be difficult to quickly stabilize.

Technical Indicators Show Buying Pressure Under Pressure

FXStreet analyst Christian Borjon Valencia pointed out that the upward trend in gold still exists on a technical level, but warning signs have appeared. The Relative Strength Index (RSI) shows a lack of clear bullish momentum.

Breaking key support levels will trigger further declines. If spot gold closes below $4,200 per ounce (already achieved on Thursday), sellers will receive a clear trading signal, pushing the gold price toward $4,100 per ounce and possibly breaking below the 20-day simple moving average (SMA) at $4,074. Once that level is breached, the next target will be near the October 28 low, around $3,886 per ounce.

Profit-Taking and Policy Shift Add to Downward Pressure

Apart from macro factors, technical profit-taking also pressured gold prices. After several days of sharp gains, investors chose to realize profits, intensifying Thursday’s decline. FXStreet analyst Christian Borjon Valencia emphasized that the combination of fading rate cut expectations and weakening safe-haven demand makes it difficult for gold prices to sustain an upward trend.

Overall, the sharp decline in gold reflects a fundamental adjustment in market expectations of Fed policy. As officials’ attitudes turn more hawkish and the probability of rate cuts drops below 50%, the appeal of traditional safe-haven assets diminishes significantly. Investors should closely monitor Fed officials’ speeches and economic data releases, as these will determine the future direction of gold.