Gold declines as Iran tensions fuel inflation risks, revive Fed hike bets and support USD
- Gold meets with a fresh supply on Thursday as energy-driven inflation fears fuel Fed hike bets.
- Escalating US-Iran tensions support the safe-haven USD, which contributes to the intraday fall.
- The technical setup seems tilted in favor of bears and backs the case for further depreciation.
Gold (XAU/USD) attracts fresh sellers during the Asian session on Thursday and drops back closer to the previous day's swing low, around the $4,025 region in the last hour. Despite soft US Consumer Price Index (CPI) and Producer Price Index (PPI) reports, elevated crude oil prices keep the possibility of a US Federal Reserve (Fed) interest rate hike later this year firmly on the table. This offers some support to the US Dollar (USD) and drives flows away from the non-yielding bullion.
The US Bureau of Labor Statistics (BLS) reported on Wednesday that the PPI unexpectedly fell 0.3% in June after a downwardly revised 0.6% rise in the previous month. Moreover, the yearly rate decelerated from 6% in May to 5.5% last month. This comes on top of the steepest month-on-month decline in the US CPI since April 2020 and indicates easing price pressures. Traders reacted by paring their expectations of an immediate Fed rate hike, which dragged the USD to its lowest level since June 18 and offered some support to the Gold price on Wednesday.
However, risks of the energy-driven inflation persist as crude oil prices stand firm near a one-month high amid escalating US-Iran tensions and supply disruptions in the Strait of Hormuz. In fact, the US carried out another round of airstrikes against Iran on Wednesday, targeting coastal defense systems and missile infrastructure. Iran responded with retaliatory drone and missile attacks on US-linked military facilities across the region. Moreover, US President Donald Trump warned that critical Iranian infrastructure could be targeted if the situation continues to deteriorate.
Adding to this, Iran's Islamic Revolutionary Guard Corps threatened to expand the conflict by targeting additional regional energy supply routes. This suggests that Iran could use its Houthi allies in Yemen to threaten shipping through the Bab el-Mandeb Strait. This continues to support crude oil prices, reviving inflationary fears and backing the case for at least one 25-basis-point (bps) Fed rate hike in 2026. This, in turn, might hold back the USD bears from placing aggressive bets and suggests that the path of least resistance for the Gold price remains to the downside.
XAU/USD daily chart
Gold bears might await break and acceptance below $4,000 before placing fresh bets
The XAU/USD pair keeps the near-term bias bearish below the 200-day Simple Moving Average (SMA) and within a broader downward parallel channel. However, mixed momentum indicators – a modestly positive Moving Average Convergence Divergence (MACD) reading around 9.43 and a Relative Strength Index (RSI) near 40.77 – hint at only tentative stabilization rather than a sustained recovery.
That said, a sustained break and acceptance below the $4,000 psychological mark would expose the year-to-date low, around the $3,943-$3,942 region, touched in June. The subsequent fall could extend further and drag the Gold price to a key structural support around $3,675.71, representing the lower band of the channel. A decisive break below this level would reinforce the prevailing bearish tone.
On the topside, initial resistance emerges at the upper boundary of the descending channel near $4,093.63, where any rebound would likely face selling pressure. A sustained break above that area would expose the 200-day SMA as the next significant barrier around $4,495.94.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
Interest rates FAQs
Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%. If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.
Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.
Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank. If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.
The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure. Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.
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