Gold remains depressed above $4,300 as USD sticks to gains amid Fed hike bets, Iran risks
- Gold kicks off the new week on a softer note as traders seem hesitant ahead of central bank events.
- Rising Fed rate-hike bets and geopolitical risks boost the USD, undermining demand for the bullion.
- The lack of any meaningful selling warrants some caution for bears before positioning for deeper losses.
Gold (XAU/USD) sticks to intraday losses through the first half of the European session, though it holds above the $4,300 mark and Friday's swing low. The downside seems cushioned as traders keenly await this week's key central bank events before placing fresh directional bets on the commodity. The US Federal Reserve (Fed), the Bank of England (BoE) and the Bank of Japan (BoJ) will announce their decisions on Wednesday, Thursday and Friday, respectively. Meanwhile, growing acceptance that central banks will stick to a more hawkish stance, amid oil-driven inflation risks, continues to undermine non-yielding bullion.
In fact, crude oil prices remain near the highest level since May 21, touched on Friday, amid Middle East jitters and clashes in the Strait of Hormuz. In the latest developments, Iran-backed Houthi fighters in Yemen said that they used drones and missiles to attack a military base in southern Saudi Arabia. Moreover, a planned regional meeting between Gulf states and Iran regarding the Strait of Hormuz has been postponed, keeping the geopolitical risk premium in play and supporting oil prices. This comes on top of hot US inflation figures, released last week, which raised bets that the Fed will raise interest rates.
According to CME Group's FedWatch Tool, traders are currently pricing in over an 85% chance that the US central bank would raise borrowing costs at the end of a two-day meeting on Wednesday. The bets were lifted by the US Producer Price Index (PPI) and Consumer Price Index (CPI) reports last week, which indicated persistence in wholesale and consumer inflation in August. This, along with persistent geopolitical uncertainties, lifts the safe-haven US Dollar (USD) to a one-and-a-half-week high, which, in turn, suggests that the path of least resistance for the XAU/USD pair remains to the downside.
Meanwhile, US President Donald Trump ramped up pressure on the Fed to keep rates unchanged or even lower them, saying that no country should have lower interest rates than the US. This, in turn, is holding back traders from placing aggressive bearish bets on the precious metal. Hence, it will be prudent to wait for some follow-through selling and acceptance below the $4,300 mark before positioning for any meaningful downside for the Gold price. The aforementioned fundamental backdrop, however, suggests that any attempted recovery might still be seen as a selling opportunity and is more likely to be capped.
US CPI surprise lifts Fed expectations as policy meetings loom
Analysts at MUFG/BTMU note that "US August CPI inflation came in higher than expected, leading a repricing higher of Fed fund rate hike expectations by the market," and in turn "setting up the scene for the FOMC and also Bank of Japan policy meetings this week." They add that "political influence on the Fed whether real or perceived including President Trump’s exhortation for lower rates could also be an important factor" in how investors interpret the central bank’s next steps.
XAU/USD 4-hour chart
Technical Analysis
Against the backdrop of the recent failure to find acceptance above the 100-period Simple Moving Average (SMA) on the 4-hour chart, last week's breakdown below the 200-SMA was seen as a key trigger for XAU/USD bears. Moreover, the Moving Average Convergence Divergence (MACD) indicator stays marginally negative, and the Relative Strength Index (RSI) around 41.33 hints at subdued, slightly bearish momentum rather than oversold conditions.
However, some follow-through selling below the 50.0% retracement level of the July-August upswing, near $4,327, is needed to back the case for deeper losses to the 61.8% retracement around $4,241 and the 78.6% retracement near $4,118. The commodity could eventually drop to the broader structural floor around the $3,961 cycle low.
On the topside, initial resistance is located at the 200-period SMA near $4,383, followed by the 38.2% Fibonacci retracement at $4,414. A sustained break above these levels would open the path toward the 100-period SMA around $4,472 and then the 23.6% retracement at $4,521, with the prior cycle high near $4,694 coming into focus only on a stronger recovery.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
Gold FAQs
Gold has played a key role in human’s history as it has been widely used as a store of value and medium of exchange. Currently, apart from its shine and usage for jewelry, the precious metal is widely seen as a safe-haven asset, meaning that it is considered a good investment during turbulent times. Gold is also widely seen as a hedge against inflation and against depreciating currencies as it doesn’t rely on any specific issuer or government.
Central banks are the biggest Gold holders. In their aim to support their currencies in turbulent times, central banks tend to diversify their reserves and buy Gold to improve the perceived strength of the economy and the currency. High Gold reserves can be a source of trust for a country’s solvency. Central banks added 1,136 tonnes of Gold worth around $70 billion to their reserves in 2022, according to data from the World Gold Council. This is the highest yearly purchase since records began. Central banks from emerging economies such as China, India and Turkey are quickly increasing their Gold reserves.
Gold has an inverse correlation with the US Dollar and US Treasuries, which are both major reserve and safe-haven assets. When the Dollar depreciates, Gold tends to rise, enabling investors and central banks to diversify their assets in turbulent times. Gold is also inversely correlated with risk assets. A rally in the stock market tends to weaken Gold price, while sell-offs in riskier markets tend to favor the precious metal.
The price can move due to a wide range of factors. Geopolitical instability or fears of a deep recession can quickly make Gold price escalate due to its safe-haven status. As a yield-less asset, Gold tends to rise with lower interest rates, while higher cost of money usually weighs down on the yellow metal. Still, most moves depend on how the US Dollar (USD) behaves as the asset is priced in dollars (XAU/USD). A strong Dollar tends to keep the price of Gold controlled, whereas a weaker Dollar is likely to push Gold prices up.
Author
Haresh Menghani
FXStreet
Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.
