- Gold struggles to capitalize on a two-day uptrend amid the emergence of some USD buying.
- Rising oil prices keep inflation risks and Fed rate hike bets on the table, underpinning the buck.
- The US-Iran standoff further benefits the USD’s safe-haven status and weighs on the commodity.
Gold (XAU/USD) sticks to modest intraday losses below the $4,400 mark heading into the European session on Tuesday and, for now, seems to have snapped a two-day winning streak. The US Dollar (USD) builds on the overnight bounce from a two-month trough as inflation risks stemming from higher oil prices underpin prospects for at least one interest rate hike by the US Federal Reserve (Fed) in 2026. Moreover, the US-Iran standoff keeps the geopolitical risk premium in play and further underpins the safe-haven Greenback, which, in turn, is seen exerting pressure on the precious metal.
In the latest developments surrounding the Middle East crisis, US President Donald Trump said that Iran should surrender to end a nearly six-month-long war. Trump added that the US is not seeking an extension of the Memorandum of Understanding (MoU) with Iran, which expired on Monday. Furthermore, Trump repeated his idea of declaring the critical Strait of Hormuz as a US territory and warned that he would target Oman if it hindered actions to reopen the strategic waterway. This comes as the Iran-backed Houthi rebels in Yemen escalated their campaign against Saudi Arabia.
Houthi military spokesperson Yahya Saree said the group used several ballistic missiles to target a Saudi military landing ship and four accompanying patrol boats off the coast of Mokha. This could further disrupt commercial shipping traffic through the Bab al-Mandeb Strait – one of the world's most important trade routes – and fuel energy supply concerns, lifting crude oil prices to a two-week high. Investors remain worried that higher energy prices would rekindle inflationary pressures, which, along with hawkish Fed expectations, remain supportive of elevated US Treasury bond yields.
According to TD Securities, the Fed is likely to "remain on hold over our forecast horizon," with the policy stance anchored by the view that "inflation should remain high for the rest of the year" and that "the labor market has stabilized, allowing the FOMC to shift focus to its inflation mandate." The bank adds that, "if the Fed were to move this year, we believe that move is more likely to be a hike than a cut," noting that under "a new management that espouses a blurrier reaction function, data dependence will likely gain prominence for determining the path ahead for monetary policy."
This offsets last week's soft US inflation and Retail Sales data, which forced investors to scale back their bets for an imminent Fed rate hike. According to CME Group's FedWatch Tool, traders are assigning around a 64% chance that the US central bank will keep rates unchanged at the September 2026 meeting. Investors, however, are still pricing in a greater possibility that the Fed will raise borrowing costs at least once by the end of this year. The outlook helps revive demand for the Greenback and prompts some intraday selling around the non-yielding Gold, though the downside seems limited.
Traders might refrain from placing aggressive directional bets and opt to wait for more cues about the Fed's future policy path. Hence, the focus will remain glued to the release of FOMC Minutes on Wednesday, which will play a key role in influencing the near-term USD price dynamics and provide some meaningful impetus to the precious metal. In the meantime, the mixed fundamental backdrop warrants some caution before positioning for any further depreciation.
XAU/USD daily chart
Technical Analysis
From a technical perspective, the precious metal continues its struggle to find acceptance above the 50% retracement level of the April-June decline. Momentum indicators, however, stay constructive. In fact, the Relative Strength Index (RSI) at 63.47 holds in bullish territory, while the Moving Average Convergence Divergence (MACD) indicator remains positive, hinting that selling pressure is corrective rather than impulsive. However, it will still be prudent to wait for a move beyond last week's swing high, around $4,450, before positioning for further gains toward the 200-day Simple Moving Average (SMA) at $4,508.
On the downside, first support is seen at the 38.2% retracement at $4,302.33, with further demand expected at the 23.6% level at $4,164.44 and then around the structural floor anchored near $3,941.54, where buyers would likely attempt to arrest a deeper correction.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
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.
Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.