Gold hangs near two-month low amid bullish USD; looks to US PCE data for fresh impetus
- Gold attracts sellers for the third straight day as fresh escalation in the Iran conflict boosts the USD.
- Inflation fears bolster Fed rate hike bets, further benefiting the USD and weighing on the commodity.
- Traders now look to the US Prelim Q1 GDP report and the key US PCE Price Index for fresh impetus.
Gold (XAU/USD) recovers slightly from a two-month low, touched earlier this Thursday, though it remains below the $4,400 mark through the first half of the European session. Moreover, an intraday breakdown below the technically significant 200-day Simple Moving Average (SMA) backs the case for an extension of a three-day-old downtrend as a fresh escalation of tensions in the Middle East boosts the safe-haven US Dollar (USD). Adding to this, expectations that global central banks will adopt a more hawkish stance to counter rising inflation validate the negative outlook for the bullion.
A US official told Reuters that the US military carried out fresh strikes in Iran on Wednesday, targeting a military site that posed a threat to American forces and commercial maritime traffic in the Strait of Hormuz. The US official also said American forces intercepted and shot down multiple Iranian drones that posed a similar threat. Moreover, US President Donald Trump said that he is not satisfied with the terms negotiated with Iran and that he won’t be rushed into a deal, dampening hopes for a diplomatic solution to end a three-month-old Iran war. Furthermore, major US-Iran disagreements over Tehran's nuclear program and the Strait of Hormuz keep geopolitical risk premium in play, which, in turn, benefits the Greenback and pressures the Gold price.
Meanwhile, the latest developments prompt a modest recovery in Crude Oil prices from over a three-week trough, touched on Thursday, fanning energy-driven inflationary concerns and fueling expectations of rate hikes. According to the CME Group's FedWatch Tool, traders are pricing in a nearly 50% chance that the US Federal Reserve (Fed) will raise borrowing costs by 25 basis points (bps) by the end of this year and assigning a 60% chance of a rate increase in January 2027. The bets were further lifted by hawkish comments from a slew of influential FOMC members, triggering a fresh leg up in US Treasury bond yields. This turns out to be another factor supporting the USD and contributing to the offered tone surrounding the non-yielding Gold.
Moving ahead, the market focus now shifts to the release of important US macro data– the Preliminary Q1 GDP report and the Personal Consumption Expenditures (PCE) Price Index. The crucial PCE Price Index report is considered as the Fed's preferred inflation gauge and will play a key role in influencing expectations about the central bank's interest rate trajectory. The outlook, in turn, should drive the USD demand later during the North American session. Moreover, the incoming geopolitical headlines would continue to infuse some volatility across the global financial markets and provide some meaningful impetus to the Gold price.
XAU/USD daily chart
Gold bears retain control below $4,400/200-SMA breakpoint
From a technical perspective, the XAU/USD pair keeps a near-term bearish tone inside a downward-sloping channel and below the 500-day SMA. Moreover, the Relative Strength Index (RSI) is hovering around 35 and hints at lingering weak demand. Adding to this, the Moving Average Convergence Divergence (MACD) indicator sits below zero with a negative reading, suggesting downside momentum still dominates.
Furthermore, the commodity might now test the descending channel support, currently near $4,311.11 as it confirms a fresh breakdown below the very important 200-day SMA. A sustained drop through the channel floor would open the way for a deeper retracement within the broader corrective phase. On the top side, any meaningful recovery might confront initial resistance near the $4,480 horizontal zone. A break higher would expose the upper boundary of the descending channel and the 50-day SMA confluence near $4,625-$4,630 as a more formidable supply zone.
(The technical analysis of this story was written with the help of an AI tool.)
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.