Gold keeps the red below $4,700 on inflation fears fuel Fed hike bets and underpin USD
- Gold attracts some sellers on Monday as renewed US-Iran tensions benefit the safe-haven USD.
- Rising Oil prices revive inflation concerns and bolster hawkish Fed bets, underpinning the buck.
- Bearish traders seem hesitant as the focus now shifts to the latest US inflation figures this week.
Gold (XAU/USD) struggles to capitalize on a modest bounce from a three-day low, touched earlier this Monday, and maintains its offered tone below the $4,700 mark through the first half of the European session. Persistent geopolitical uncertainties turned out to be a key factor underpinning the US Dollar's (USD) reserve currency status. Adding to this, expectations for a more hawkish US Federal Reserve (Fed) offer additional support to the buck and contribute to driving flows away from the non-yielding yellow metal.
The optimism over a potential US-Iran peace deal and the de-escalation of conflict faded quickly amid renewed hostilities in the Strait of Hormuz. Adding to this, US President Donald Trump and Iran both rejected each other’s peace proposals for ending the war and the gradual reopening of the Strait of Hormuz amid major disagreements over Iran's nuclear program. In fact, the Wall Street Journal reported that Iran has rejected US demands to dismantle its nuclear facilities and suspend uranium enrichment for 20 years. Trump quickly lashed out at the Iranian response, calling it "totally unacceptable." This keeps geopolitical risks in play and regains some positive traction on Monday, which, in turn, is seen exerting some pressure on the Gold price.
Meanwhile, the latest development triggers a fresh leg up in Crude Oil prices and revives inflationary concerns. This, along with the upbeat US employment data released on Friday, backs the case for a more hawkish Fed going forward. The popularly known US Nonfarm Payrolls (NFP) report showed that the economy added more-than-expected 115K new jobs in April, while the Unemployment Rate held steady at 4.3%. Moreover, the CME Group's FedWatch Tool indicates that traders are currently pricing in just over a 20% chance that the US central bank would deliver at least one 25-basis-point (bps) rate hike by the end of this year. The outlook, in turn, favors the USD bulls and backs the case for a further downfall for the non-yielding Gold.
Traders, however, seem reluctant to place aggressive directional bets and opt to wait for the release of US inflation figures – the Consumer Price Index (CPI) and the Producer Price Index (PPI) on Tuesday and Wednesday, respectively. Apart from this, investors this week will confront the release of US monthly Retail Sales, which, along with speeches from influential FOMC members, will drive the USD and provide some impetus to the Gold price. Meanwhile, the lack of follow-through selling warrants caution before confirming that the recent rebound from the $4,500 psychological mark, or over a one-month low touched last week, has run out of steam.
XAU/USD 4-hour chart
Gold bears look to seize control below 200-period SMA on H4
From a technical perspective, the precious metal holds a neutral tone following last week's repeated failures to make it through the 61.8% Fibonacci retracement level of the April-May downfall. The subsequent slide below the 200-period Simple Moving Average (SMA), however, lacks follow-through. Moreover, the Relative Strength Index (RSI) hovers just above the 50 line, hinting at modest positive bias, while the Moving Average Convergence Divergence (MACD) remains below zero with a negative reading, suggesting that bullish momentum is not yet fully convincing.
In the meantime, the 50.0% retracement around $4,696 is likely to act as an immediate resistance, with further hurdles seen at the 61.8% level near $4,743 and then the 78.6% retracement around $4,810. A sustained break above these barriers would open the way toward the recent cycle high close to $4,894. On the downside, the 200-period SMA at $4,675 offers immediate support ahead of the 38.2% Fibo. retracement near $4,650, with deeper protection seen at the 23.6% level around $4,592 and the structural low region anchored near $4,498.
(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.