Gold extends range play above $4,050 as Fed hike bets and Iran risks underpin USD
- Gold struggles to gain any meaningful traction as the US-Iran uncertainty supports the USD.
- Fed hike bets remain on the table amid inflation risks stemming from rebounding oil prices.
- Hawkish Fed expectations should cap the commodity as traders await the US NFP report.
Gold (XAU/USD) struggles to attract any meaningful buyers and trades below the $4,100 mark during the first half of the European session on Tuesday as traders opt to wait for further developments surrounding the Middle East crisis. The uncertainty over US-Iran peace talks continues to act as a tailwind for the safe-haven US Dollar (USD) and cap the commodity. Furthermore, recovering crude oil prices keep inflation risks and US Federal Reserve (Fed) rate-hike bets on the table, helping the Greenback preserve the overnight recovery from its lowest level since mid-June and contributing to keeping a lid on the non-yielding bullion.
On Monday, Iran denied that any negotiations were taking place with the US, sparking an angry backlash from President Donald Trump, who had cited the resumption of bilateral talks as justification for calling off attacks over the weekend. Moreover, Iran’s Islamic Revolutionary Guard Corps (IRGC) has reportedly attacked a US military base in Kuwait with at least three drones. This, in turn, tempers hopes for a diplomatic resolution to end a five-month-old US-Iran war, prompting traders to price in the geopolitical risk premium and supporting the safe-haven Greenback.
Meanwhile, a senior adviser to Iran's Supreme Leader, Mohsen Rezaee, dismissed Trump's claims that the Strait of Hormuz is on course to reopen. Rezaee further warned that Iran will not permit any unauthorised shipping route through the critical waterway other than the one designated by the Islamic Republic and that Tehran would target US warships for that purpose. This comes on top of the Iran-backed Houthi rebels' naval blockade against Saudi Arabia and fuel concerns regarding global energy supplies, helping oil prices to recover a part of the previous day's losses.
Investors remain worried that elevated energy prices would rekindle inflationary pressures and force the Fed to adopt a more hawkish stance. According to the CME Group's FedWatch Tool, traders are currently assigning over a 60% probability that the US central bank will raise borrowing costs in September and see over an 85% chance of a hike by the end of this year. The bets were reaffirmed by the US ISM PMI released on Monday, which showed that US manufacturing sector activity increased to the highest level in more than four years in July. This further favors USD bulls.
Traders, however, might refrain from placing aggressive directional bets and opt to wait for the release of the closely-watched US monthly employment details, popularly known as the Nonfarm Payrolls (NFP) report on Friday. The crucial data will be looked for more cues about the Fed's policy path, which, in turn, will play a key role in influencing the near-term USD price dynamics and providing some meaningful impetus to the Gold price. Nevertheless, the aforementioned fundamental backdrop suggests that the path of least resistance for the bullion is to the downside.
XAU/USD daily chart
Technical Analysis: Gold seems vulnerable in a multi-week-old range, below 200-day SMA
From a technical perspective, the XAU/USD pair holds well below the 200-day Simple Moving Average (SMA) and keeps a bearish near-term bias within a familiar range held over the past month or so. Moreover, the range-bound price action might still be categorized as a bearish consolidation phase against the backdrop of the recent decline, reaffirming the negative outlook for the Gold price.
Meanwhile, momentum indicators are not yet supportive of a clear recovery. The Moving Average Convergence Divergence (MACD) stays in positive territory with a modestly positive histogram, while the Relative Strength Index (RSI) at 46.48 hovers just below the neutral 50 line, hinting at lacklustre buying interest. This, in turn, suggests that bounces are likely to be capped by overhead supply.
The top boundary of the trading range, pegged ahead of the $4,200 mark, might continue to act as an immediate hurdle. A move beyond could lift Gold to the 200-day SMA near $4,490.33. Bulls would need to reclaim a technically significant barrier to alleviate the prevailing downside bias and reopen the path toward higher highs.
On the downside, immediate support is inferred from recent swing lows around the $3,976–$4,000 region, where buyers previously emerged. A daily close below would be seen as a fresh trigger for bearish traders and turn the XAU/USD pair vulnerable to declining further in the absence of clearly defined floors under the said handle.
(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.
