Gold gaps lower as higher-for-longer Fed outlook weighs on sentiment
- Gold opens the week with a bearish gap as stalled US-Iran talks keep geopolitical tensions and Oil prices elevated.
- Oil-driven inflation fears continue to support the higher-for-longer interest rate narrative, weighing on the non-yielding metal.
- On the 4-hour chart, XAU/USD holds above lower Bollinger Band support near $4,660, though momentum indicators point to fading trend strength.
Gold (XAU/USD) opens the week with a bearish gap as persistent uncertainty surrounding the US-Iran war continues to fuel Oil-driven inflation fears, maintaining pressure on central banks to keep borrowing costs elevated. At the time of writing, XAU/USD is trading around $4,670, down nearly 1% on the day after touching an intraday high near $4,705.
Nuclear disagreements keep US-Iran talks deadlocked
Hopes for a near-term peace deal faded after US President Donald Trump rejected Iran’s response to a US-backed proposal aimed at ending the war, calling it “totally unacceptable” in a post on Truth Social.
Iranian state media said Tehran’s proposal included demands for US compensation for war damages and stressed Iran’s sovereignty over the Strait of Hormuz.
Iran’s Foreign Ministry spokesperson Esmaeil Baghaei said on Monday that Tehran was only trying to secure its rights and had offered “generous and responsible” suggestions to the US. Baghaei also said the proposal by his country was not excessive and accused Washington of making “unreasonable demands.”
Despite ongoing diplomatic efforts, talks remain unresolved over Iran’s nuclear program, raising uncertainty over how long the US-Iran war could continue. This has heightened fears of prolonged supply disruptions through the Strait of Hormuz, keeping a geopolitical risk premium embedded in Oil prices.
Gold struggles as higher-for-longer rate expectations weigh on sentiment
Soaring Oil prices are reinforcing expectations that major central banks, particularly the Federal Reserve (Fed), may have to keep interest rates higher for longer and could even consider raising rates again if inflation pressure intensifies.
Investors are now awaiting the upcoming US Consumer Price Index (CPI) data due on Tuesday, which could influence expectations for the Fed’s monetary policy path.
According to the CME FedWatch Tool, traders largely expect the Fed to keep borrowing costs unchanged for the rest of the year, though markets are pricing in a small chance of a rate hike at the December meeting, with the probability standing around 20%.
A higher interest rate environment reduces the appeal of non-yielding assets like Gold because the precious metal does not offer any yield or interest. When borrowing costs remain elevated, investors often shift toward interest-bearing assets such as government bonds and other fixed-income instruments.
Against this backdrop, Gold’s upside remains capped as markets continue to react to elevated Oil prices and shifting interest rate expectations. Still, downside pressure remains limited as ongoing geopolitical uncertainty supports safe-haven demand, while steady central bank, retail and investment buying continues to provide underlying support for the precious metal.
Technical analysis: Bollinger mid-band caps recovery attempts near $4,700
On the 4-hour chart, XAU/USD consolidates after its recent advance, holding above the lower Bollinger Band support near $4,659 but still trading below the Bollinger 20-period Simple Moving Average (SMA) at $4,703, which keeps the topside capped and the near-term tone mildly heavy. The Relative Strength Index hovers just under the 50 line, while the Average Directional Index (14) retreats toward the low-20s, both suggesting fading directional conviction rather than a strong trend.
On the upside, initial resistance is located at the Bollinger 20-period simple moving average around $4,703, followed by the upper Bollinger Band near $4,747. A sustained break above these bands would open the way toward the more distant horizontal barrier at $4,850. On the downside, immediate support is seen at the lower Bollinger Band around $4,659, with a more important floor at the horizontal level of $4,500. A drop through this latter area would significantly weaken the broader technical picture.
(The technical analysis of this story was written with the help of an AI tool.)
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.
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