Gold drops to nearly two-week low as hawkish Fed bets rise amid oil-driven inflation fears
- Gold attracts some follow-through selling on Monday amid rising September Fed rate hike bets.
- US-Iran tensions lift crude oil prices and fuel inflation fears, bolstering hawkish Fed expectations.
- The USD struggles to lure buyers, holding back XAU/USD bears from positioning for deeper losses.
Gold (XAU/USD) attracts fresh sellers following an intraday uptick to the $4,472 region and drops to a one-and-a-half-week low during the Asian session on Monday. Traders ramped up bets for an interest rate hike in reaction to Federal Reserve (Fed) Chair Kevin Warsh's remarks on curbing inflationary pressures on Friday, which, in turn, continues to undermine the non-yielding bullion. However, modest US Dollar (USD) weakness helps the precious metal show some resilience below the $4,400 mark and trim a part of its intraday losses.
Speaking at the Fed’s annual symposium in Jackson Hole, Wyoming, Warsh acknowledged that inflation is running hot and also hinted that interest rates could need to move higher if more progress isn’t made on easing price pressures. Traders were quick to react and are now pricing in around a 60% chance that the US central bank will raise borrowing costs in September. Moreover, CME Group's FedWatch Tool indicates an 88% probability of a December increase, which lifted the USD to a two-week high on Friday and led to an over 3% fall in the Gold price.
The selling bias remains unabated at the start of a new week as escalating US-Iran tensions lift crude oil prices and fuel inflation fears, bolstering hawkish Fed expectations. US forces struck two rocket launchers on Iran’s Larak Island in the Strait of Hormuz on Sunday, the first American strikes on the Islamic Republic since late July, prompting Iran to retaliate by launching ballistic missiles at two US bases in Jordan. Moreover, US Treasury Secretary Scott Bessent said that new secondary sanctions were likely to be unveiled weekly in the effort to pressure Iran.
Despite the supportive fundamental backdrop, the safe-haven USD struggles to attract any follow-through buying amid soft US Treasury bond yields. This, in turn, holds back traders from placing fresh bearish bets on the Gold price and helps limit the downside. Nevertheless, the aforementioned fundamental backdrop seems tilted in favor of USD bulls, suggesting that any recovery in the XAU/USD pair is likely to be sold into. Traders now look to key US macro releases, scheduled for the start of a new month, including the Nonfarm Payrolls (NFP) report on Friday.
XAU/USD 4-hour chart
Technical Analysis
Friday's break below the 100-period Simple Moving Average (SMA) on the 4-hour chart, for the first time since early August, was seen as a key trigger for bearish traders. Moreover, the commodity is now trading below the 38.2% Fibonacci retracement of the rally from late July lows, validating the near-term negative outlook. Meanwhile, the Moving Average Convergence Divergence (MACD) indicator remains deeply negative, while the Relative Strength Index (RSI) sits in oversold territory near 25, hinting at persistent downside pressure even if a short-lived corrective bounce cannot be ruled out.
Hence, a subsequent fall towards the next relevant support at the 50.0% retracement near $4,346.16, ahead of the 61.8% level at $4,263.27, looks like a distinct possibility. A break below the latter would expose deeper structural floors at $4,145.27 and $3,994.96. On the topside, immediate resistance is seen at the 38.2% retracement at $4,429.04, followed by the 100-period SMA around $4,475.07 and the 23.6% Fibo. level near $4,531.59, while the cycle high at $4,697.36 marks a more distant barrier for any sustained recovery.
(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.