Gold remains depressed near $4,700 on firmer USD; looks to US CPI for fresh impetus
- `Gold struggles to capitalize on modest Asian session gains to a three-week high.
- Iran tensions and hawkish Fed bets underpin the USD, weighing on the commodity.
- Traders now look to the US inflation figures before positioning for a firm direction.
Gold (XAU/USD) maintains its offered tone below through the early European session on Tuesday and is currently placed around the $4,700 as traders keenly await the release of the US consumer inflation figures.
In the meantime, the incoming negative headlines surrounding the Middle East crisis dampen hopes for a US-Iran peace deal and benefit the US Dollar's (USD) reserve currency status. Furthermore, a diplomatic setback remains supportive of elevated Crude Oil prices, fueling inflationary concerns and bets for more hawkish central banks, including the US Federal Reserve (Fed). This provides an additional boost to the USD and also contributes to the non-yielding yellow metal's intraday pullback from a three-week high.
In fact, US President Donald Trump dismissed Iran’s proposal to end a more than two-month-old conflict amid disagreements over Tehran's nuclear program and a standoff over the critical Strait of Hormuz. Furthermore, CNN reported that Trump has grown impatient with the continued closure of the strategic waterway and also frustrated with how the Iranians are handling negotiations to end hostilities. Adding to this, some Trump aides say that he is now more seriously considering a resumption of major combat operations than he has in recent weeks. This sparks fears of a fresh escalation in the conflict and further benefits the USD, exerting some downward pressure on the Gold price.
Meanwhile, traders are still pricing in around a 25% chance that the US central bank will hike interest rates by the end of this year amid worries that the war-driven surge in energy prices will rekindle inflationary pressures. Hence, the market focus will remain glued to the crucial US Consumer Price Index (CPI), which should influence expectations about the Fed's policy path and drive the USD demand. Nevertheless, hawkish Fed expectations turn out to be another factor that lends some support to the USD and contributes to the bullion's intraday pullback from the $4,773-$4,774 region. The lack of follow-through selling, however, warrants caution before placing bearish bets on the Gold price.
XAU/USD 4-hour chart
Gold could accelerate the corrective fall once 100-SMA pivotal support on H4 is broken
From a technical perspective, the XAU/USD pair showed some resilience below the 100-period Simple Moving Average (SMA) on the 4-hour chart on Monday. The subsequent rebound from the 38.2% Fibonacci retracement level of the April-May downfall and a breakout through the 61.8% Fibo. level favors bullish traders.
Meanwhile, momentum indicators hint that upside pressure is firm but not yet in a strong trending phase. In fact, the Relative Strength Index (RSI) around 58 suggests moderate bullish momentum, while the Moving Average Convergence Divergence (MACD) histogram is hovering just below zero.
On the topside, immediate resistance is aligned at the 61.8% Fibo. retracement around $4,742, with further hurdles at the 78.6% level near $4,807 and the recent swing high at $4,890. On the downside, initial support is seen at the 50.0% retracement near $4,696, followed by the 100-period SMA around $4,671 and the 38.2% retracement at approximately $4,651. A deeper setback would expose the 23.6% retracement near $4,594 and the structural floor around $4,503.
(The technical analysis of this story was written with the help of an AI tool.)
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
Author
Haresh Menghani
FXStreet
Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.
