Gold snaps two-day rally before Fed rate statement

Gold fell on Wednesday, as investors took profits following a two-day rally on soft U.S. economic data that hurt the dollar and lowered expectations for a Federal Reserve rate hike in June.

Spot gold fell 0.6 percent to USD1,205 an ounce by 0941 GMT. It gained nearly 3 percent in the last two sessions, climbing to a three-week high of USD1,215 on Tuesday.

U.S. gold futures for June delivery fell USD7.90 an ounce to USD1,206.50, after rising to its highest since April 7 in the previous session.

"There has been some short-covering in the futures market because people are re-assessing their views on the Fed, but that is already fading," Julius Baer analyst Carsten Menke said.

"However, any delay to the interest rates hike may cause more support to prices, either via improving sentiment in the futures market or weakening the dollar further."

Bullion has been boosted in recent days after a string of U.S. data, including consumer confidence released on Tuesday, weakened the dollar and hinted at slowing momentum in the world's largest economy.

The dollar was near two-month lows against a basket of major currencies, as the market hedged the risk that the Fed might adopt a more dovish tone in its statement following the two-day policy review due later on Wednesday. [FRX/]

"The statement is expected to be dovish," ANZ said in a note. "Since the FOMC last met in mid-March, U.S. data have been mostly soft, confirming the weak start to the year."

Investors will also get an early read of how the U.S. economy fared in the first quarter with GDP data due to be released just hours before the Fed statement.

A softer dollar should boost gold, as it makes it cheaper for holders of other currencies. However, traders remain cautious as they expect the U.S. economy will eventually improve and the Fed will start tightening its interest rates cycle at some point, denting the investment appeal of gold, a non-interest bearing asset.

"Beyond the short term, we struggle to see solid support from fundamentals ... so despite this potential delay by the Fed people are not rushing into gold," Menke said.

Higher gold prices have also dampened Asian physical demand.

In China, the second biggest gold consumer, premiums eased to about USD1 an ounce on Wednesday over the global benchmark, from USD2-USD3 in the previous session.

Silver fell 0.5 percent to USD16.52 an ounce, snapping two days of gains. Platinum was down 0.3 percent at USD1,149.50 an ounce, while palladium dropped 0.5 percent to USD772 an ounce.