Gold flirts with $4,300 as inflation fears reaffirm Fed bets and underpin bullish USD
- Gold struggles to capitalize on an intraday uptick as the Fed’s hawkish stance caps the upside.
- Oil-driven inflation fears support US bond yields, underpinning the USD and weighing on the bullion.
- Traders await further developments surrounding the Middle East crisis before placing directional bets.
Gold (XAU/USD) attracts follow-through selling for the second straight day, with bears now looking to extend the slide further below the $4,300 mark during the first half of the European session on Tuesday. The US Federal Reserve's (Fed) hawkish outlook continues to underpin the US Dollar (USD) and is seen as a key factor driving flows away from the non-yielding yellow metal.
In fact, the Fed’s updated Summary of Economic Projections showed that officials expect at least one more rate hike this year. Furthermore, Boston Fed President Susan Collins and St. Louis Fed President Alberto Musalem explicitly backed the case for further policy tightening as inflation risks remain elevated due to a commodity price shock. Meanwhile, crude oil prices stage a modest recovery from a nearly two-week low, reviving inflationary concerns and supporting US bond yields. This keeps the USD near its highest level since late July, touched on Friday, and also exerts pressure on gold.
Meanwhile, Iran's Islamic Revolutionary Guard Corps (IRGC) warned on Monday that it would change the geography of the war if the US escalates the conflict. The US, on the other hand, is stepping up economic pressure on Iran, warning that Iranian airlines could effectively be shut out of international aviation from September 23. Adding to this, intensifying fighting between the Iran-backed Houthi group in Yemen and Saudi Arabia keeps the geopolitical risk premium in play, triggering a modest bounce in crude oil prices and favoring USD bulls. This, in turn, suggests that the path of least resistance for the gold is to the downside and backs the case for a further intraday depreciating move.
The downside for the commodity, however, seems limited as traders await further developments surrounding the Middle East crisis and their implications for inflation. This would influence interest rate expectations and drive the bullion. Apart from this, the focus will on a crucial meeting between US President Donald Trump and his Chinese counterpart Xi Jinping on Thursday. Furthermore, speeches from influential FOMC members will drive the USD and gold. Nevertheless, the fundamental backdrop suggests that the commodity could aim to retest a six-week low, touched last Wednesday.
XAU/USD daily chart
Technical Analysis
The XAU/USD pair holds a mildly bearish near-term bias below the 100-day Exponential Moving Average (EMA) at $4,377. The 38.2% Fibonacci retracement level of the June-August upswing, at $4,410, caps the upside, while the 50.0% retracement at $4,321 lends some support to the precious metal. Momentum indicators are mixed, with the Relative Strength Index (14) hovering near a neutral 48.81 and the Moving Average Convergence Divergence (MACD) below zero and showing a contracting negative profile. This, in turn, hints at fading downside pressure but not yet signaling a sustained recovery.
Meanwhile, a break below the 50.0% retracement level would expose the 61.8% Fibo. level at $4,232 and deeper structural levels at $4,105 and $3,943 if selling extends. On the topside, initial resistance emerges at the 100-day EMA at $4,377 ahead of the 38.2% Fibo. retracement at $4,410, with further barriers seen at $4,521 and the cycle high anchor near $4,699. Only a clear daily close above this EMA-Fibonacci cluster would ease the current bearish tone.
(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.
