Gold remains capped as hawkish Fed, higher bond yields and Iran risks support USD

• Gold holds steady during the Asian session on Friday as the USD pauses for a breather.
• The Fed’s hawkish tilt, elevated US bond yields, and geopolitical risks favor USD bulls.
• The XAU/USD pair remains on track to register weekly losses and seems vulnerable.

Gold (XAU/USD) struggles to capitalize on a modest Asian session uptick on Friday and languishes near the weekly low, touched the previous day amid a bearish fundamental backdrop. The US Dollar (USD) pauses for a breather following the recent strong rally to a nearly two-month high and turns out to be a key factor offering some support to the commodity. However, the US Federal Reserve's (Fed) hawkish outlook, elevated US bond yields, and persistent geopolitical uncertainties favor USD bulls. This, in turn, keeps the precious metal below the $4,300 mark.

Fed speakers have given more hawkish signals following the September rate hike and are leaning toward potential further policy tightening. In fact, Fed Governor Michael Barr said on Wednesday that the backdrop of rising inflationary risks and a strong economy means the US central bank is likely to deliver more rate hikes. Furthermore, a private survey showed that US business activity this month jumped to its highest level since July 2021 and prices paid by businesses for inputs surged to a nearly four-year high. Adding to this, New York Fed President John Williams noted on Thursday that another interest rate hike this year would be a reasonable expectation.

Williams flags resilience and inflation risks as Fed tone stays firmly hawkish

Fed’s Williams delivered a notably firm message, with the FXS Speechtracker score at 7.2/10, above the 6.2/10 historical average, underscoring a more hawkish tone relative to the established baseline. The emphasis on “remarkable resilience” in the US economy, receding downside risks to maximum employment, strong AI-related demand, and the remark that another rate hike by year-end is “reasonable” all point to a Fed still focused on taming inflation, even as explicit forward guidance is dialed back.

The FXS Fed Sentiment Index slipped by 0.18 points to 148.63, indicating a modest pullback in hawkish intensity despite the strong speech score on the FXS Speechtracker. With the index still far above the neutral 100 mark, the Fed’s stance remains clearly hawkish, suggesting ongoing support for the Dollar even as markets reassess the durability of higher yields.

Moreover, inflation risks stemming from elevated energy prices, due to tensions in the Middle East and a possible 90-day ban on US diesel exports, support prospects for further tightening by the Fed. This, in turn, pushes US bond yields to multi-year peaks. In fact, the yield on the benchmark 10-year US Treasury hovers near levels not seen since July 2007, which supports the buck and should cap the upside for the non-yielding Gold. Moreover, the uncertainty over how and when the US-Iran conflict could end validates the near-term positive outlook for the safe-haven Greenback and warrants some caution before positioning for any meaningful recovery for the bullion.

In the latest developments, Trump said earlier this week that he had been considering extremely severe military action against Iran. Meanwhile, Iranian President Masoud Pezeshkian said that Tehran remains committed to its nuclear program and would refuse to bow to US pressure, raising concerns about whether the two countries can reach a peace deal. Adding to this, Iran-backed Houthis in Yemen launched missile and drone attacks on a sensitive target in Saudi Arabia’s capital, Riyadh, and on Aramco facilities. This keeps the geopolitical risk premium in play and suggests that the path of least resistance for the USD is to the upside, warranting caution for XAU/USD bulls.

XAU/USD 4-hour chart

Technical Analysis

The precious metal keeps a bearish near-term bias below the 50.0% retracement level of the June-August upswing and the 200-period Simple Moving Average (SMA) on the 4-hour chart. The latter coincides with the 38.2% Fibonacci retracement at $4,408 and reinforces a heavy topside cap. Meanwhile, the Moving Average Convergence Divergence (MACD) indicator remains negative and below its signal line, hinting at persistent downside pressure. The Relative Strength Index (RSI) near 42 stays shy of overbought territory and suggests room for further weakness before any oversold conditions emerge.

However, a break below the 61.8% Fibo. retracement at $4,231 is needed to back the case for deeper losses to the 78.6% level at $4,105 before the prior cycle low area near $3,945 comes into view on a continuation of the current slide. On the topside, initial resistance is aligned at the 50.0% retracement at $4,320, ahead of a denser barrier where the 38.2% level at $4,408 converges with the 200-period SMA at $4,417. A sustained break above this area would be needed to soften the bearish tone.

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