Gold Holds Near Recent Lows as Rate-Hike Expectations Weigh on Prices

Key Moments

Gold Under Pressure Despite Modest Intraday Rebound

Gold (XAU/USD) stages a mild bounce in early European trading on Wednesday after briefly hitting a new low since March 23, yet the metal continues to trade with a downside bias close to the $4,200 level. The move lower is being driven by renewed selling interest, as investors respond to geopolitical developments and shifting monetary policy expectations.

Rising tensions between the United States and Iran are feeding worries about inflation and reinforcing market expectations for a more aggressive stance from central banks. Those expectations are prompting investors to rotate out of non-yielding assets such as gold. The latest slide is also being linked to technical factors, following a clear break below the key 200-day Simple Moving Average (SMA).

US-Iran Escalation Supports Oil, Keeps Risk Premiums Elevated

The United States carried out self-defense strikes against Iran on Tuesday after a US Apache helicopter was shot down in the Strait of Hormuz. In retaliation, Iran’s Islamic Revolutionary Guard Corps (IRGC) stated that it had targeted an airbase in Jordan that hosts US forces, as well as Kuwait and Bahrain, and warned of “a more severe response” if US actions continued.

In addition, Iran’s Foreign Minister Abbas Araghchi said that the country’s armed forces would not leave any attack or threat unanswered and warned the US to leave the region or face consequences. These developments are sustaining geopolitical risk premiums and are helping Crude Oil prices remain above the two-month low reached the previous day.

Fed Policy Expectations and Dollar Caution Ahead of CPI

Data from CME Group’s FedWatch Tool indicate that market participants are assigning nearly a 75% probability that the US Federal Reserve will raise interest rates by the end of this year, amid concerns that elevated energy costs could keep inflation stubbornly high. This outlook for tighter policy is an additional headwind for gold.

However, US Dollar (USD) buyers appear cautious, choosing to stay on the sidelines ahead of the upcoming US Consumer Price Index (CPI) release. The inflation report is expected to be pivotal for shaping views on the Fed’s policy trajectory and could deliver fresh direction to the USD. Until then, the prevailing macro backdrop is likely to keep pressure on gold prices.

Technical Landscape: Oversold but Still Vulnerable

From a chart perspective, the latest downward move confirms a clean break below a descending channel that has been in place since the April swing high. Gold continues to trade beneath its 200-day SMA, reinforcing the short-term bearish outlook and supporting the possibility of additional downside.

The daily Relative Strength Index (14) sits near 28, pointing to oversold conditions, while the Moving Average Convergence Divergence (MACD) indicator remains deep in negative territory, underlining the current bearish momentum. This technical setup leaves gold exposed to a further slide, including a potential retest of the March swing low around the $4,100 region.

On the upside, the former channel support near $4,238 now acts as the first significant resistance level. Above that, the 200-day SMA around $4,444 is the next hurdle. A sustained recovery beyond the 200-day SMA would begin to alleviate the broader downside pressure implied by the descending channel and could open the door for a move toward the channel top near $4,546 and the prior swing reference around $4,634.

Federal Reserve: Mandate, Meetings, and Balance Sheet Tools

Monetary policy in the United States is set by the Federal Reserve (Fed), which operates under a dual mandate of promoting price stability and maximum employment. The primary instrument the Fed uses to pursue these objectives is the federal funds rate, which influences borrowing costs throughout the economy.

When inflation runs above the Fed’s 2% target and prices are rising too quickly, the central bank increases interest rates. Higher rates tend to support the US Dollar (USD) by making US assets more attractive to global investors. Conversely, when inflation is below 2% or the Unemployment Rate is elevated, the Fed may reduce interest rates to stimulate borrowing and spending, a move that typically weighs on the Greenback.

The Federal Open Market Committee (FOMC) – the Fed’s policy-setting body – meets eight times per year to review economic conditions and decide on monetary policy. The FOMC consists of twelve Fed officials: the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year rotating terms.

Quantitative Easing and Quantitative Tightening

In periods of severe stress or unusually low inflation, the Fed can employ Quantitative Easing (QE), a non-standard policy tool designed to increase the flow of credit when financial markets are impaired. Under QE, the Fed creates additional Dollars and uses them to buy high-grade bonds from financial institutions, which generally exerts downward pressure on the USD.

The opposite process, Quantitative Tightening (QT), involves the Fed discontinuing bond purchases and allowing its existing bond holdings to mature without reinvestment. By reducing its balance sheet in this way, QT tends to be supportive of the US Dollar.