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Gold hits two-week high as traders weigh Middle East risks, Fed outlook

  • Gold extends its rebound as bargain hunters return following recent weakness.
  • Higher-for-longer Fed expectations remain a headwind for Gold.
  • Technically, XAU/USD holds above the 21-day SMA with resistance near $4,200.

Gold (XAU/USD) climbs to a two-week high on Wednesday as bargain hunters step in near the $4,000 mark, while traders weigh Middle East risks and the Federal Reserve’s (Fed) monetary policy outlook.

At the time of writing, XAU/USD trades around $4,122, up 1.1% on the day.

While fresh buying interest lifts Bullion, the broader fundamental backdrop has changed little. The United States carried out an 11th straight night of strikes on Iran, while Tehran responded with fresh attacks targeting Bahrain, Kuwait and Jordan.

The tit-for-tat attacks are disrupting energy supplies through the Strait of Hormuz, pushing Oil prices higher again and adding to inflation concerns.

West Texas Intermediate (WTI) trades around $86.50, its highest level since June 11.

Rising inflation risks support expectations that the Fed will keep interest rates higher for longer and may even consider raising them as it seeks to bring inflation back to its 2% target.

Higher borrowing costs make interest-bearing assets more attractive, reducing the appeal of the non-yielding metal. Meanwhile, a firm US Dollar (USD) and elevated US Treasury yields also make it harder for the commodity to build on its recent rebound.

This suggests Gold may struggle to stage a stronger recovery until inflation concerns ease and Fed rate hike bets cool.

In the near term, the metal is likely to trade within a range as traders brace for the July 28-29 Federal Open Market Committee (FOMC) meeting. According to the CME FedWatch Tool, the probability of a July rate hike has climbed to 28% from 10% a week ago, while the odds of a September hike stand at 69%.

The US economic calendar offers little on Wednesday, leaving traders focused on developments in the Middle East. US Secretary of State Marco Rubio said Washington would reduce Iran’s ability to target shipping whenever possible and warned that a nuclear-armed Iran was intolerable.

Technical analysis: XAU/USD attempts a recovery as RSI and MACD improve

XAU/USD maintains a capped tone, holding below the long-term 200-day Simple Moving Average (SMA) at $4,496 and the 100-day SMA at $4,501. The metal is, however, supported by the 21-day SMA at $4,065, hinting at near-term stabilization above this short-term trend marker.

The Relative Strength Index (RSI) on the daily chart is neutral at 50, while the Moving Average Convergence Divergence (MACD) indicator has turned slightly positive, suggesting improving momentum that has yet to overcome the prevailing overhead supply.

On the topside, initial resistance is seen at the horizontal barrier near $4,200, followed by a stronger cap at $4,400 before the broader bearish structure defined by the 200-day SMA at $4,496 and the 100-day SMA at $4,501.

On the downside, immediate support emerges around the 21-day SMA at $4,065, followed by the horizontal floor at $4,000. A decisive break below this level could trigger deeper losses.

(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

Vishal Chaturvedi

I am a macro-focused research analyst with over four years of experience covering forex and commodities market. I enjoy breaking down complex economic trends and turning them into clear, actionable insights that help traders stay ahead of the curve.

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