Gold weakens below $4,100 as inflation fears lift Fed hike bets and support USD
- Gold extends the previous day's modest pullback from an over two-week high.
- Inflation fears bolster Fed rate hike bets and exert pressure on the commodity.
- Hawkish Fed expectations revive the USD demand, which contribute to the fall.
Gold (XAU/USD) attracts some sellers during the first half of the European session on Thursday and slides below the $4,100 mark, retreating further from an over two-week high touched the previous day. A further escalation of tensions between the US and Iran lifts crude oil prices to a fresh high since June 11, fueling inflation fears and bolstering US Federal Reserve (Fed) interest rate hike expectations. This keeps US Treasury bond yields well supported near a multi-month high and is seen acting as a headwind for the non-yielding bullion.
The US and Iran traded strikes for a 12th night in a row, while Yemen's Iran-aligned Houthis opened a new front in the war and declared a blockade on a key Red Sea shipping route that facilitates about 7% of the world’s oil supply. This comes on top of a significant fall in shipping traffic through the Strait of Hormuz and exacerbates supply disruption concerns, assisting crude oil to prolong its month-to-date uptrend. Investors remain worried that rising energy prices would rekindle inflationary pressure and force central banks to adopt a more hawkish stance.
According to the CME Group's FedWatch Tool, traders are currently pricing in over a 90% chance that the Fed will hike interest rates by the end of this year. The outlook remains supportive of elevated US bond yields, with the benchmark 10-year Treasury bond yield holding firm near a two-month high. This, in turn, helps the US Dollar (USD) to attract some dip-buyers, which is seen as another factor driving flows away from the Gold. However, it will still be prudent to wait for strong follow-through selling before confirming that a one-week-old uptrend has run out of steam.
Analysts at Deutsche Bank highlight that the rates move was accompanied by a notable shift in policy expectations, with investors now "priced in a more hawkish path for the Fed, with 34bps of hikes now priced in by the December meeting, up +2.3bps on the day." They note that this repricing has helped reinforce the recent rise in US real yields and the broader selloff across the Treasury curve.
Traders now look forward to the release of the usual Weekly Initial Jobless Claims data from the US for some impetus during the early North American session. Furthermore, the highly-anticipated European Central Bank (ECB) meeting could infuse some volatility in financial markets. Apart from this, further developments surrounding the Middle East crisis should contribute to producing short-term trading opportunities around Gold.
XAU/USD 4-hour chart
Gold bulls turn cautious after failing to find acceptance above 200-EMA on H4
The XAU/USD pair stalled a one-week-old uptrend near the $4,155-$4,165 confluence – comprising the 200-period Exponential Moving Average (EM) on the 4-hour chart and the 23.6% Fibonacci retracement level of the April-June downfall. The said area should now act as a key pivotal point for short-term traders amid constructive momentum indicators. The Relative Strength Index (RSI) hovers near 63, and the Moving Average Convergence Divergence (MACD) stays positive, hinting that buyers retain some control but are constrained by overhead supply.
This, in turn, suggests that the precious metal would first need to clear the aforementioned clustered resistance to back the case for any further appreciation. A sustained break above this would open the way towards 23.6% Fibo. retracement at $4,164.97 and the denser barrier near the 38.2% retracement at $4,303.59. On the downside, the primary structural floor is the Fibo. anchor at $3,940.90, where a deeper pullback could find demand and attempt to rebuild a more stable base for Gold.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
Interest rates FAQs
Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%. If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.
Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.
Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank. If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.
The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure. Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.
Author
Haresh Menghani
FXStreet
Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.
