• Gold gains some positive traction on Tuesday, though the upside potential seems limited.
  • Fed rate hike bets and oil-driven inflation fears keep US bond yields near multi-year highs.
  • Geopolitical uncertainties further underpin the USD, which should cap the precious metal.

Gold (XAU/USD) clings to modest recovery gains through the first half of the European session, albeit it lacks follow-through and remains below $4,150. Moreover, the bearish fundamental backdrop keeps the precious metal within striking distance of the lowest level since August 4, around the $4,100 neighborhood touched on Monday, and warrants caution before positioning for any meaningful appreciation. The US Federal Reserve's (Fed) hawkish outlook, elevated US bond yields, and geopolitical risks keep the US Dollar (USD) pinned near a two-month top, which, in turn, is seen capping the bullion.

The US central bank delivered the widely expected 25 basis point (bps) rate hike—its first in over three years—earlier this month and signaled a firm commitment to suppressing sticky inflation. Adding to this, a slew of influential FOMC members stated that another interest rate increase may be appropriate before the end of 2026. According to CME Group's FedWatch Tool, traders are pricing in a 70% chance that the Fed would raise borrowing costs again in October amid inflation risks stemming from higher energy prices due to the Middle East conflict.

Cook flags persistent inflation risks from AI and geopolitics, keeps Fed bias hawkish

Fed’s Cook delivers a slightly more hawkish-than-usual tone, with the FXS Speechtracker score at 7/10, marginally above the established baseline of 6.9/10. Cook highlights continued inflation pressure in coming months from artificial intelligence and Middle East conflict, stressing that any future rate adjustments will depend on incoming inflation and labor data, even as the labor market is described as well positioned to absorb higher rates. While Cook acknowledges that AI-driven productivity should bring modest disinflation over the next few years, the warning that these gains will not arrive in time to offset broadening inflation this year reinforces a near-term hawkish bias and keeps DOLLAR-supportive risks in focus.

The FXS Fed Sentiment Index slipped by 0.63 points to 146.89, indicating a modest pullback in perceived hawkishness despite the speech’s above-baseline score on the FXS Speechtracker. With the FXS Fed Sentiment Index still well above the neutral 100 mark, the Fed remains firmly in hawkish territory, suggesting that any future rate hikes or a prolonged higher-for-longer stance continue to underpin DOLLAR strength even as market expectations cool slightly at the margin.

In the latest development, US President Donald Trump rejected a peace proposal from Iran to resolve their military conflict and reopen the Strait of Hormuz immediately on meeting their terms. Furthermore, Trump denied a report by the news outlet Axios that he offered Iran sanctions relief and the release of frozen funds in return for concrete Iranian steps regarding the nuclear program. This keeps the geopolitical risk premium in play and continues to support crude oil prices, fueling inflationary concerns and pushing US bond yields to multi-year highs.

In fact, the yield on the 30-year US government bond shot to its highest level since mid-May 2004, while the benchmark 10-year Treasury yield touched its highest since mid-June 2007 and the rate-sensitive 2-year yield rose to the highest since May 2024. This, in turn, favors USD bulls and makes it prudent to wait for strong follow-through buying before confirming that the Gold price has bottomed out. Traders might also opt to wait for this week's important US macro releases before placing aggressive directional bets on the XAU/USD pair.

The US Personal Consumption Expenditures (PCE) Price Index – the Fed's preferred inflation gauge – is due on Wednesday, along with the final Q2 GDP print. This will be followed by the US ISM Manufacturing PMI on Thursday, though the focus will remain glued to the closely watched US Nonfarm Payrolls (NFP) report on Friday. Apart from this, speeches from influential FOMC members would be scrutinized for more cues about the Fed's future policy path, which, in turn, will drive USD demand and provide some meaningful impetus to the Gold price.

XAU/USD daily chart

Technical Analysis

The XAU/USD pair maintains a bearish near-term tone following the recent breakdown below the 200-day Exponential Moving Average (EMA) at $4,310 and the mid-range Fibonacci retracement levels. The metal has slipped back under the 61.8% retracement at $4,227, keeping it confined within the lower half of the recent range. Meanwhile, the Moving Average Convergence Divergence (MACD) shows a negative reading at 26.21, and the Relative Strength Index (RSI) at 36.40 hovers just above oversold territory, hinting at persistent downside pressure but with scope for intermittent corrective bounces.

Any further recovery, however, might face initial resistance at the 61.8% Fibo. retracement at $4,227, ahead of a dense barrier formed by the 200-day EMA at $4,310 and the 50% retracement at $4,316. Further hurdles emerge at $4,406 and $4,517 before the recent cycle high near $4,696. On the downside, immediate support appears at the 78.6% retracement at $4,099, with a deeper floor at the prior swing low around $3,937. A decisive break below the latter would reinforce the prevailing bearish bias, while sustained trading above $4,227 would be needed to start easing the downside pressure.

(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.

Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.