US Fed rate cut decision today: What a 25 bps or 50 bps cut may mean for dollar and gold prices

The US Federal Reserve’s interest rate decisions have effects on both the US dollar and gold prices. As the Fed wraps up its two-day policy meeting today (September 18), markets are anticipating a potential rate cut.

The outcome could trigger shifts in the dollar’s strength and gold’s value.

Impact of a rate cut on the US dollar

A Fed rate cut typically weakens the US dollar.

Lower interest rates reduce the returns on dollar-denominated assets. This makes currency less attractive to investors.

The dollar index, which measures the greenback’s value against other major currencies, has been trending downward since its peak in June 2024.

This decline reflects market expectations of a rate cut.

“Investors are focusing on the Fed’s rate cut, which could weaken the dollar,” noted Mitsuru Muraishi, an analyst at Fujitomi Securities.

A smaller rate cut of 25 bps may offer some stability to the dollar, but a larger 50 bps cut would likely deepen its decline, as market sentiment has largely priced in aggressive easing.

The financial markets have already priced in a 63% chance of a 50 bps cut, according to CME’s FedWatch tool.

However, should the Fed opt for a smaller cut, this could strengthen the dollar temporarily, as aggressive cuts are no longer the baseline expectation.

How gold reacts to interest rate cuts

Gold, which is priced in dollars, typically benefits from a weaker US dollar.

When the Fed cuts rates, the opportunity cost of holding non-yielding assets like gold decreases, making it a more attractive option for investors.

“As the opportunity cost of holding gold decreases, we may see increased demand for gold-backed ETFs from asset managers, especially in the West,” said Ole Hansen, head of commodity strategy at Saxo Bank.

25 bps vs. 50 bps cut: What’s the difference?

An overwhelming majority in the market has priced in a 50 basis point cut today.

If Jerome Powell decides to go for a lesser rate cut, there could be a dip in gold prices.

“While we see some tactical downside to gold prices under our economists’ base case of a 25-basis-point Fed cut on Wednesday, we expect a gradual boost to ETF holdings — and thus gold prices — from the Fed’s easing cycle,” analysts told Bloomberg. “Since ETF holdings only increase gradually as the Fed cuts, this upside is not yet fully priced in,” they added.

Goldman Sachs analysts expect some tactical downside for gold if the Fed opts for a smaller, 25 bps cut.

However, they anticipate that the broader easing cycle will eventually drive gold prices higher.

They reiterate their long-term price target of $2,700 per ounce by early 2025.

They further emphasised, “ETF holdings only increase gradually as the Fed cuts, so this upside is not yet fully priced in.”

A larger 50 bps cut, on the other hand, would likely provide an immediate boost to gold prices.

The weakening dollar would drive demand for safe-haven assets like gold.

This will lead to a surge in prices as investors react to the more aggressive easing.

Jateen Trivedi, VP Research Analyst at LKP Securities, highlighted that traders are already eyeing potential retracements in gold prices.

“Given the potential for significant overnight gaps due to the Fed’s decision, traders should exercise strict risk management strategies,” he said.

Catch our latest updates on US Fed rate decision here