• 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.

Gold (XAU/USD) retreats from its highest level since June 5, touched earlier this Tuesday, and slides back below the $4,400 mark heading into the European session. Despite Friday's weak 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, in turn, is seen as a key factor driving flows away from the non-yielding bullion.

In the latest developments surrounding the Middle East crisis, 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 fall suggest that buyers retain control. Momentum indicators also back this constructive structure. 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.

The next relevant hurdle is pegged around the 61.8% Fibo. retracement at $4,514.92, where a break would open the way toward the 78.6% retracement at $4,669 and the cycle high around $4,866.98. On the downside, 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.

(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.

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