Gold retreats further from two-month high, eyes $4,350 as Fed rate hike bets support USD

Gold attracts heavy selling following an intraday move up to over a two-month high on Tuesday.
Higher oil prices keep Fed hike bets on the table, driving flows away from the non-yielding bullion.
Traders look to the latest US inflation figures and geopolitical developments for further cues.

Haresh Menghani FXStreet

Gold (XAU/USD) extends its intraday retracement slide from the highest level since June 5 and drops to a fresh daily low, near the $4,350 area during the first half of the European session on Tuesday. Despite Friday's disappointing US Nonfarm Payrolls (NFP) report, traders are still pricing in the possibility that the US Federal Reserve (Fed) will raise borrowing costs by the year-end amid inflation risks stemming from volatile oil prices. This tends to undermine the non-yielding bullion and prompts traders to take some profits off the table, especially after a strong rally over the past week or so.

Meanwhile, Iran ruled out any future negotiations with US President Donald Trump and said that it will wait until his term ends on January 20, 2029, to resume talks, dampening hopes for the reopening of the Strait of Hormuz. Furthermore, traffic through the Bab el-Mandeb Strait remains choked due to the Iran-backed Houthis' blockade against Saudi Arabia. This led to the overnight sharp rise in crude oil prices and fueled inflation fears, underpinning prospects for a more hawkish Fed.

The outlook, in turn, remains supportive of elevated US Treasury bond yields, which is seen lending support to the USD and exerting pressure on the non-yielding yellow metal. Traders now look forward to the release of the US Consumer Price Index (CPI) and the Producer Price Index (PPI) on Wednesday and Thursday, respectively, for more cues about the Fed's future policy path. The crucial data will play a key role in influencing the near-term USD price dynamics and providing some meaningful impetus to the Gold price.

Apart from this, further developments surrounding the Middle East crisis might continue to infuse volatility across global financial markets and contribute to producing trading opportunities around the XAU/USD pair.

XAU/USD daily chart

Technical Analysis

An intraday breakout through the 100-day Simple Moving Average (SMA) and the 50.0% Fibonacci retracement of the April-June suggested that buyers retain control. Momentum indicators also backed the constructive structure. Moreover, the Relative Strength Index (RSI) is hovering just below overbought territory at 68.89, and the Moving Average Convergence Divergence (MACD) histogram is expanding in positive territory. This, in turn, suggests persistent upside pressure while the Gold price remains capped beneath the 200-day SMA at $4,498.

That said, a deeper pullback would expose the 38.2% retracement at $4,297 and then the 23.6% level at $4,162, ahead of the structural floor near $3,945. On the top side, the $4,400 mark, followed by the daily swing high, near $4,435 could act as immediate hurdles ahead of the 61.8% Fibo. retracement at $4,514.92. A break above would open the way toward the 78.6% retracement at $4,669 and the cycle high around $4,866.98.

(The technical analysis of this story was written with the help of an AI tool. Know more.)

Interest rates FAQs

What are interest rates?

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.

How do interest rates impact currencies?

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.

How do interest rates influence the price of Gold?

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.

What is the Fed Funds rate?

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.

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