Dollar Rallies, Gold Pulls Back as the Fed Cuts and Warns of More

USD, FOMC, Gold Talking Points:

• Today was a lesson in expectations, or perhaps more accurately the importance of how much those expectations have built into price ahead of a widely-awaited market event.
• Ahead of the Fed, I looked at gold with a very similar scenario last year, while also talking about how traders could approach such scenarios. The first support level looked at in that piece is now in-play.
• The USD is green on the day even though the Fed cut rates and warned that they expect another 50 bps in cuts for the rest of this year. But – like I said in yesterday’s webinar, it was all about the dot plot matrix and expectations for what’s next, and the Fed forecast just 25 bps of cuts for next year against the 50-75 that had been priced-in. As such, the USD has rallied with the less-dovish outlay and that’s compelled a sizable pullback in gold and equities.

It's still in the early aftermath of the FOMC rate decision so it remains to be seen whether this was a ‘buy the rumor, sell the news’ event or whether it was a simple pullback from oversold conditions in the USD and overbought conditions in gold after the Fed didn’t sound quite as dovish as markets had hoped.

That said, it would be difficult to call a rate meeting when the bank cut rates and warned that rate cuts were expected at the final two meetings of this year as anything but dovish; especially considering that they kept their expectation for inflation to hold at 3.1% for Core PCE.

The main worry cited by Powell, as he called this a ‘risk management rate cut,’ was the labor market. But, even that brings a question as the Fed continued to forecast a 4.5% unemployment rate into the end of this year and they even whittled that down to 4.4% for next year and 4.3% for 2027 – both improvements of 0.1% from the last set of projections released in June.

If there was a dovish outlier that got attention, it was one lone dot in the projections looking for rates to finish the year between 2.75-3.0%, far from any other expectations with a grouping of votes looking for rates to finish 2025 from 3.5-3.75%.

That dot was like from newly-installed Fed member Stephan Miran, and given that Trump will get to shape the Fed more to his liking when Powell’s term concludes next May, it can be seen that a more dovish push may be on the way, with that outlier dot as a sign of what’s to come, even as inflation is expected to hold well-above the Fed’s 2% target.

Dot Plot Matrix from September 2025 FOMC

Image prepared by James Stanley; data from Federal Reserve

US Long-Term Rates

From a price perspective, the USD actually looks quite similar to last year when the Fed started cutting rates. Similarly, the rate cut last September 18^th was well-expected and a surprise to no one, even though it was a 50 bp ‘jumbo’ move. The Wall Street Journal publishing a report the Monday before helped to allay the shock factor, but when the Fed made that announcement the USD hurriedly pushed down to a fresh low – and then stalled. And then it rallied into the end of the session and that support held into the end of Q3 until, eventually, bulls took over.

Along with that was a strong run in US rates, with the 10-year moving from a pre-cut low of 3.6% to 4.8% in January just ahead of Trump’s inauguration. And the 30-year, which has more of a tie to mortgage rates in the US, went from a pre-rate cut low of inside 3.9% to over 5% in early-January.

It was inflation expectations that helped to feed those moves because if we were seeing both growth and inflation projections move up, why would an investor want to hold long-term government paper yielding a paltry sub-4%? Well, interestingly, 10-year treasuries held support at 4% and are up on the day, albeit modestly. The 30-year is also seeing higher yields today despite the Fed’s cut and that’s held just above the 4.6% marker. Last year’s run in rates took a couple weeks to show after the Fed began to cut, so that’s certainly something to watch for here.

U.S. Treasury – 30-Year

Chart prepared by James Stanley; data derived from Tradingview

USD

It was a strong Q4 for the US Dollar and as I had highlighted, it seemed unlikely that both USD strength and strength in equites would continue to run in tandem for long.

The USD took a strong turn-lower in March as recessionary fears began to show in the US and here we are, six months later, and the economy has actually held up fairly well. But, the rate cuts that started to get expected back then are still very much in the forefront as the Fed softened today even with Core CPI at 3.1%, as of the last read.

But – it was the way that the USD performed around that rate cut last year that remains of interest for our current situation, as DXY punched down to a low of 100.22 before rallying into the end of the day. And then after about two weeks of gyration, USD bulls took over in Q4 and ran a massive rally into the end of the year.

Interestingly, that 100.22 level is what set the high for the USD back in July, just after the FOMC meeting when Powell had said that policy didn’t seem overly restrictive, which tamped down expectations for rate cuts. And despite inflation actually moving higher since then and the unemployment rate holding up fairly well, Powell sang a far different tune at Jackson Hole which is what helped to push a parabolic-like move in gold, which I’ll look at in a moment.

In the USD, the big question now is whether the Fed pulling back the reins, even just a little bit, on those exuberant rate cut expectations that had priced in, will be enough to provoke a change in trend. I’ve called this the ‘capitulation scenario’ in webinars in the past and given the lack of reaction to a fresh three-year-low with today’s daily bar printing as green, that would certainly remain as a potential scenario.

US Dollar Daily Chart

Chart prepared by James Stanley; data derived from Tradingview

Gold

I wrote quite a bit about gold ahead of the rate decision, so I’ll try to keep this section brief.

What really prodded gold was Powell opening the door to rate cuts at his speech in Jackson Hole. Before that, gold was in a bull pennant formation that had been building for four months. But, when the head of the FOMC signaled that he was ready to cut rates, even with inflation at or around 3%, the fiat debasement element was too great to ignore, and it led to a near-parabolic like move in the metal.

I talked about this at-length in yesterday’s webinar as well, where a simple less-dovish outlay from the Fed could bring a pullback, which is what we’ve seen so far. Price is now re-testing that 3654 area and this presents a possible spot of higher-low support. While the Fed may not have been as dovish as what markets wanted, they did show that not only are they willing to cut with inflation remaining high, they’re willing to do it again.

Gold Four-Hour Chart

Chart prepared by James Stanley; data derived from Tradingview

--- written by James Stanley, Senior Strategist