Gold recovers from monthly low; hawkish Fed outlook and firm USD to limit gains
- Gold recovers slightly from the vicinity of the monthly low, though the upside seems capped.
- Escalating US-Iran tensions and inflation worries revive Fed hike bets, which favor USD bulls.
- The bearish technical setup backs the case for the emergence of fresh selling at higher levels.
Gold (XAU/USD) attracts some buyers during the Asian session on Friday, reversing a part of the previous day's losses back closer to the monthly low. Any meaningful recovery, however, seems elusive amid a bearish fundamental backdrop. Crude oil prices have jumped over 10% this week as renewed US-Iran clashes stoked supply concerns, reviving inflation fears and lifting expectations that the US Federal Reserve (Fed) will keep rates higher for longer. This, in turn, is seen acting as a tailwind for the US Dollar (USD) and undermining the non-yielding bullion.
The US-Iran conflict is entering a dangerous new phase as both sides exchanged intensifying fire on Thursday, with the latter expanding its military campaign beyond conventional military targets. In fact, officials in southern Iran's Bandar Abbas reported that civilian infrastructure – including power facilities and a train station – has been hit. Iran retaliated with missile and drone attacks targeting US-allied Gulf nations. Tensions have also escalated around the Strait of Hormuz, with the US intercepting commercial vessels attempting to breach its naval blockade around Iran.
Meanwhile, Iran's Islamic Revolutionary Guard Corps had threatened to expand the conflict by targeting additional regional energy supply routes. In fact, Reuters reported that Iran has asked Yemen’s Houthis to stand ready to close the Red Sea oil route. This helps crude oil prices in preserving the recent gains at a one-month high, reviving concerns about energy-driven inflation. Adding to this, the upbeat US macro data and hawkish comments from influential Fed officials reinforced expectations that the US central bank will raise borrowing costs at least once by the end of this year.
The US Labor Department reported on Thursday that the number of Americans filing new applications for unemployment benefits dropped to a seasonally adjusted 208 K for the week ended July 11. The reading was below consensus estimates and underscored the resilience of the US labor market. Separately, the Philadelphia Fed Manufacturing Index surged from 10.3 to 41.4 in July, hitting its highest level since November 2021 and indicating a rapid acceleration in regional factory activity. Further details revealed that both price indicators continued to signal rising prices.
Furthermore, Dallas Fed President Lorie Logan said that the positive news this week on consumer and wholesale prices still wasn’t good enough to signal real help for US households. She called for modestly higher interest rates to win a battle the central bank has been losing for the past five years. Apart from this, Fed Vice Chair Philip Jefferson said that he would be open to raising rates if inflation does not show near-term improvement. According to the CME Group's FedWatch Tool, traders are currently pricing in a nearly 75% chance of a 25-basis-point (bps) Fed rate hike by December.
The aforementioned factors favor the USD bulls, suggesting that any subsequent recovery in the Gold price is more likely to be sold into and fizzle out rather quickly. Traders now look forward to Friday's US economic docket – featuring Building Permits, Housing Starts, Industrial Production data, and the prelim University of Michigan Consumer Sentiment Index and Inflation Expectations. This, along with Fed speak, would drive the USD and provide some impetus to the Gold price, which remains on track to register losses for the second consecutive week.
XAU/USD daily chart
Gold’s bearish technical setup warrants caution before positioning for any meaningful recovery
From a technical perspective, the XAU/USD pair has been trending lower along a downward-sloping channel and remains below the very important 200-day Simple Moving Average (SMA). This reaffirms the near-term bearish outlook for Gold and suggests that rallies are likely to remain capped within the broader corrective phase. Meanwhile, the Moving Average Convergence Divergence (MACD) indicator has turned modestly positive, while the Relative Strength Index (RSI) near 40 hints at only a tentative stabilization rather than a sustained recovery.
Hence, any further move up could face an initial hurdle at the channel top near $4,082.74, with stronger structural resistance at the 200-day SMA clustered around $4,495.44. On the downside, the lower boundary of the descending channel at $3,661.05 acts as key support, and a decisive break below this zone would reinforce the prevailing bearish structure and expose further downside within the current trend.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named 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 during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of 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.
