Gold built on a strong couple of sessions on August 17, and the Federal Reserve's shifting policy outlook deserves most of the credit. Spot gold rose 0.9% to settle at $4,417.24 per ounce, while December futures climbed 0.8% to $4,473.70, as a softening US dollar and a string of weaker economic readings reshaped the calculus on Fed policy.

The dollar index, which tracks the greenback against a basket of major trading-partner currencies, fell to its lowest point in more than two months, closing in on the psychologically significant 100 level. For gold, a weaker dollar functions as a tailwind: the metal is priced in dollars globally, so when the greenback declines, buyers holding other currencies effectively receive a discount.

What the data showed

The catalyst behind the dollar's slide was a pair of economic reports that came in well below expectations. July nonfarm payrolls — the headline employment figure from the government's monthly jobs report — fell by 23,000 jobs, a stark miss against the consensus forecast for an 80,000 gain. The unemployment rate held at 4.1%.

Inflation data also cooperated, at least from the perspective of anyone positioned against a rate hike. The July Consumer Price Index rose just 0.1% month-over-month, pushing the annual rate down to 3.4%. Core CPI, which strips out food and energy, increased 0.2% for the month and 2.5% year-over-year. Both measures remain above the Federal Reserve's 2% inflation objective, so the softening labor market and still-elevated inflation pull in opposite directions on the Fed's dual mandate of maximum employment and price stability — the tension at the heart of the current policy debate.

The CME FedWatch Tool, which aggregates market-implied probabilities from futures contracts, captured the shift precisely. The probability of a September rate hike fell to 33%, down from 51.2% recorded the prior month.

Why rate expectations move gold

The relationship between interest rates and gold is worth spelling out, because it drives this story entirely. Gold pays nothing — no coupon, no dividend, no yield. When interest rates rise, the opportunity cost of holding gold increases, because capital parked in bullion could otherwise be earning returns in bonds or cash. When rate expectations fall, that cost shrinks and gold becomes relatively more attractive. The current arithmetic sharpens that effect: with the policy rate at 3.50%–3.75% and annual inflation at 3.4%, the inflation-adjusted return on short-term dollar holdings is close to flat, compressing the real opportunity cost of holding a zero-yield asset.

The same dynamic plays out through the dollar channel. Higher rate expectations typically strengthen the dollar, as global capital flows toward higher-yielding US assets; lower expectations do the reverse. A weaker dollar makes dollar-denominated gold cheaper for international buyers, broadening the pool of potential demand. Rate expectations dominate gold's short-term price action, but they are not the only force in the market: central banks have been persistent net buyers of the metal in recent years, a structural shift in demand documented by World Gold Council data, alongside jewelry consumption and investment vehicles such as exchange-traded funds.

What to watch from here

Fed meeting minutes, scheduled for release on August 19, will be parsed closely for any indication of how policymakers are weighing recent labor market weakness against lingering inflation concerns. At its July 2026 meeting, the Federal Reserve maintained the policy rate within the 3.50%–3.75% range, and markets are now watching for signals ahead of the September FOMC meeting scheduled for September 15–16.

The principal risk to the current setup is a data surprise in the opposite direction. A strong jobs print or a hotter-than-expected inflation reading could revive rate hike expectations abruptly, push the dollar back up, and create a meaningful headwind for gold. With the implied probability of a hike standing at 33%, markets have already priced in a fair amount of optimism, leaving room for disappointment should the economic picture shift.