Gold drifts lower as USD recovers amid Fed hike bets and geopolitical tensions

• Gold meets with a fresh supply on Friday as the USD rebounds from a one-and-a-half-month trough.
• Escalating US-Iran tensions keep inflation risks and Fed rate hike bets in play, supporting the USD.
• The technical setup seems tilted in favor of bearish traders and backs the case for further losses.

Gold (XAU/USD) continues with its struggle to build on gains beyond the $4,100 mark and drifts lower during the Asian session on Friday, snapping a two-day winning streak. The US Dollar (USD) regains positive traction and reverses part of the previous day's heavy losses to its lowest level since June 17. Furthermore, inflation risks stemming from volatile crude oil prices keep bets on an interest rate hike by the US Federal Reserve (Fed) firmly on the table and exert some downward pressure on the non-yielding bullion.

The US data released on Thursday pointed to moderating economic growth and signs of cooling inflation, which tempered bets for an immediate Fed rate hike and led to the overnight slump in the USD. In fact, the first estimate published by the US Bureau of Economic Analysis (BEA) showed that the US economy expanded at an annual rate of 1.5% in the second quarter, down from 2.1% in the previous quarter and consensus estimates. Moreover, the headline US Personal Consumption Expenditures (PCE) Price Index fell 0.1% in June, marking the first monthly decline since April 2020 as the temporary truce in the Iran war sent gas prices lower.

Adding to this, the yearly rate decelerated from 4.1% to 3.7%, in line with market expectations. Meanwhile, the core gauge – the Fed's preferred measure of underlying inflation – rose by 0.1% during the reported month compared to 0.3% in May and eased from 3.4% to 3.3% on an annual basis. However, volatile crude oil prices – due to the US-Iran standoff and concerns about significant disruptions to global energy supplies – suggest that inflation remains a concern. In the latest developments, the US military announced it had completed a heavy wave of strikes against Iran, in response to Iranian missile attacks on its forces in the Middle East.

Meanwhile, Iran rejected Oman's plan for a 50-50 joint management, which would see Tehran partially control the Strait of Hormuz and collect voluntary fees for using the waterway. On the other hand, Saudi Arabia is building an international coalition to protect key shipping routes in the Bab al-Mandab Strait, the Red Sea, and the Gulf of Aden from repeated attacks by Yemen's Houthi militias. This raises the risk of a wider regional conflict, keeping the geopolitical risk premium in play and supporting crude oil prices. Investors remain worried that rising energy prices would revive inflationary pressure and force the Fed to adopt a hawkish stance.

According to the CME FedWatch Tool, traders are still pricing in over an 85% chance that the US central bank will raise borrowing costs at least once by the end of this year. The outlook, in turn, remains supportive of elevated US Treasury bond yields, which helps revive the USD demand and drives some flows away from the non-yielding Gold. Traders now look to the University of Michigan US Consumer Sentiment and Inflation Expectations Index for some impetus. Nevertheless, the XAU/USD pair remains confined within a multi-week-old range, awaiting a fresh trigger before the next leg of a directional move.

XAU/USD daily chart

Technical Analysis: Gold once again fails to find acceptance above $4,100 as setup favors bears

From a technical perspective, the range-bound price action witnessed over the past month or so might still be categorized as a bearish consolidation phase against the backdrop of a breakdown below the 200-day Simple Moving Average (SMA). That said, mixed momentum indicators warrant some caution. The Moving Average Convergence Divergence (MACD) histogram has eased slightly from recent highs but stays in positive territory, and the Relative Strength Index (RSI) hovers just under the 50 line, hinting at a weak recovery within a still-dominant downside backdrop.

On the top side, the top boundary of the trading range, around the $4,175 area, could act as an immediate hurdle ahead of $4,200, which, if cleared, should pave the way for additional gains to the 200-day SMA at $4,490.81. Bulls would need to clear the said barrier to ease the prevailing bearish tone and open the way for a more sustained recovery. Meanwhile, immediate support is inferred from recent swing lows around the $3,976–$4,000 area, where buyers previously emerged.

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