Rate hike and rate cut in gold trading

A rate hike is an increase in a central bank’s policy interest rate; a rate cut is a decrease. The Fed usually moves in steps of 25 basis points (0.25 percentage points), sometimes 50 or more in a crisis or a fast tightening cycle.

How it applies to gold trading

Gold pays no interest. Higher rates raise the return on cash and bonds, increasing the opportunity cost of holding gold, and often strengthen the dollar. Lower rates do the reverse. That is why hiking cycles have often been difficult periods for gold and easing cycles supportive, although other forces, such as central bank buying, inflation fears and geopolitics, can override the pattern.

Markets price expected decisions in advance through fed funds futures, so the announcement often moves gold less than the guidance that comes with it. A “hawkish cut,” a cut paired with signals that few more will follow, can send gold lower on the day.

Worked example

Example (hypothetical numbers): the Fed cuts by 25 basis points as 90% expected. The dot plot shows fewer cuts next year than in the previous projection. Gold first jumps from 4,010 to 4,022, then falls to 3,990 during the press conference. A trader who bought the headline at 4,020 with a $10 stop loses $10 × 100 × 0.20 = $200.

A common mistake

Trading the decision headline instead of the surprise and the guidance. Check what was priced in beforehand.

See also: Fed funds rate, FedWatch, FOMC, Opportunity cost.

Frequently asked questions