Gold recovers further from one-month low; hawkish rate bets and firm USD to limit upside
- Gold gains some positive traction, though the fundamental backdrop warrants caution for bulls.
- Inflation fears continue to fuel bets for more hawkish central banks and undermine the bullion.
- US-Iran tensions benefit the USD’s reserve currency status and further weigh on the commodity.
Gold (XAU/USD) recovers further from an over a one-month low, touched the previous day, and climbs further beyond the $4,550 level during the first half of the European session on Tuesday. The uptick, however, lacks any obvious fundamental catalyst and runs the risk of fizzling out rather quickly, warranting some caution before positioning for any meaningful upside. Heightened US-Iran tensions continue to fuel inflationary concerns and keep expectations of higher interest rates alive. Moreover, the underlying bullish sentiment surrounding the US Dollar (USD) might contribute to capping the non-yielding bullion.
The fragile ceasefire between the US and Iran is on the brink of collapse after a severe flare-up of violence in the Persian Gulf on Monday. The United Arab Emirates (UAE) and South Korea reported strikes on ships in the vital channel. The UAE also said a fire broke out at the oil port of Fujairah following Iranian missile and drone attacks. US President Donald Trump warned that Iran would be blown off the face of the earth if it attacks American vessels escorting ships through the strategic waterway under a new initiative called "Project Freedom".
The latest developments raise the risk of a further escalation of tensions in the Middle East and have triggered a fresh leg up in Crude Oil prices on Monday. This reaffirms market expectations that the war-driven surge in energy prices will revive inflationary pressure and prompt major central banks, including the US Federal Reserve (Fed), to adopt a more hawkish stance. According to the CME Group's FedWatch Tool, the probability of a Fed rate hike by the end of this year currently stands at roughly around 35% compared to less than 10% last Friday.
"The bigger driver is macro, with higher energy prices fueling inflation, pushing central banks toward a more hawkish stance, and reducing expectations for rate cuts, which is an overall negative setup for Gold," said Antreas Themistokleous, trading content specialist at Exness. "A stronger US Dollar is adding further pressure on the price and could drive it lower in the near term," he added.
The outlook, in turn, remains supportive of elevated US Treasury bond yields and acts as a tailwind for the USD. Furthermore, the US-Iran standoff over the Strait of Hormuz turns out to be another factor that benefits the Greenback's reserve currency status and validates the near-term negative outlook for the commodity, suggesting that any subsequent move up is more likely to get sold into. Hence, it will be prudent to wait for strong follow-through buying before confirming that the Gold has bottomed out and positioning for further gains.
XAU/USD 4-hour chart
Gold bears have the upper hand while below $4,600 hurdle
From a technical perspective, the XAU/USD pair retains a bearish near-term bias as it holds beneath the 200-period Simple Moving Average (SMA) at $4,655.02. The precious metal is also capped by the 38.2% Fibonacci retracement of the March-April upswing, leaving price confined under a dense resistance band despite a modest bounce from the $4,500 mark, or the 50% retracement level.
Meanwhile, momentum indicators remain soft, with the Relative Strength Index (RSI) hovering below the 50 line at 39.84 and the Moving Average Convergence Divergence (MACD) indicator in negative territory. This, in turn, hints that the attempted recovery could continue to fade under overhead supply at the 38.2% Fibo. at $4,595.23. A subsequent move up might confront hurdles near the 200-period SMA at $4,655.02 and then the 23.6% retracement at $4,711.12.
On the downside, initial support emerges at the 50% level near $4,501.57, ahead of the 61.8% retracement at $4,407.90, with deeper cushions at $4,274.55 and $4,104.68 if bearish pressure accelerates.
(The technical analysis of this story was written with the help of an AI tool.)
(This story was corrected on May 5 at 08:21 GMT to say, in the first paragraph, that Gold climbs beyond the $4,550 level, not $4,650.)
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.
