Gold Edges Higher as Iran Risks Offset Fed Outlook

Key Moments

Gold Finds Support as Dollar Bulls Step Back

Gold (XAU/USD) is trading with a firmer tone into the European session on Wednesday, appearing to end a two-session decline that had taken prices below $4,100 to a weekly low set on Tuesday. The move higher comes as the US Dollar (USD) eases, with market participants trimming long positions ahead of the publication of the June Federal Open Market Committee (FOMC) meeting Minutes. That softer USD backdrop is offering some support to bullion.

Even so, the broader setup encourages caution. The metal is rebounding from a pullback that began just above the $4,200 area, where XAU/USD printed a two-week high on Monday, and there is not yet a clear signal that this corrective phase has fully played out.

Geopolitics and Inflation Fears Support the Dollar, Limit Gold

Tensions between the United States and Iran have re-emerged as a key risk factor. The US military carried out additional strikes on Iran on Tuesday following reports of attacks on three oil tankers in the Strait of Hormuz, putting a fragile ceasefire in jeopardy. Market participants swiftly incorporated a higher geopolitical risk premium, which could continue to underpin the Greenback’s appeal as a reserve and safe-haven currency and, in turn, restrict upside in Gold.

In a further escalation, the US moved to unwind a major concession that had allowed Iran to sell oil on global markets. That policy shift drove a sharp rally in crude oil prices on Tuesday. The renewed strength in energy markets has stirred fresh concerns about inflation and reinforced perceptions that the US Federal Reserve (Fed) will stick with a “higher for longer” interest-rate stance.

Rates Market Prices In More Fed Tightening

Data from the CME Group’s FedWatch Tool indicate that market participants are currently assigning better than an 80% probability that the Fed will deliver at least one 25 basis points (bps) rate increase by year-end. Anticipation of a more hawkish tone in the forthcoming Fed Minutes is helping to push US Treasury yields higher.

On Wednesday, the yield on the benchmark 10-year US Treasury rose to 4.567%, while the two-year, seen as more sensitive to policy expectations, climbed to 4.189%. Higher yields tend to favor USD bulls and weigh on non-yielding assets such as Gold, suggesting that any upside in XAU/USD may remain constrained without a more decisive shift in the policy or macro backdrop.

Given this environment, waiting for more sustained buying interest before adopting a fresh bullish stance on the XAU/USD pair appears prudent.

Technical Picture: Downtrend Channel Still Dominant

From a chart perspective, Gold remains confined within a downward-sloping channel, maintaining a bearish short-term bias while trading below the 200-day Simple Moving Average (SMA). The Moving Average Convergence Divergence (MACD) indicator has turned positive, pointing to a possible short-term recovery attempt. However, the Relative Strength Index (RSI) stands at 44.33, below the 50 midline, signaling a cautious tone rather than a confirmed bullish reversal.

This combination implies that rallies may struggle to extend and could be met with selling interest near the upper boundary of the channel, around $4,164.35, even as momentum shows signs of improvement. A clear break above that level, followed by a sustained move through the 200-day SMA at $4,491.30 – a more critical technical barrier – would be needed to significantly ease the broader downside pressure.

On the downside, the first notable structural support is located near the lower edge of the channel around $3,713.85. Market participants may look to defend that zone as the broader trend floor if the current rebound fades and XAU/USD resumes its decline within the bearish channel.

Gold Market Context and Safe-Haven Role

Gold has played a key role in human’s history as it has been widely used as a store of value and medium of exchange. Currently, apart from its shine and usage for jewelry, the precious metal is widely seen as a safe-haven asset, meaning that it is considered a good investment during turbulent times. Gold is also widely seen as a hedge against inflation and against depreciating currencies as it doesn’t rely on any specific issuer or government.

Central banks are the biggest Gold holders. In their aim to support their currencies in turbulent times, central banks tend to diversify their reserves and buy Gold to improve the perceived strength of the economy and the currency. High Gold reserves can be a source of trust for a country’s solvency. Central banks added 1,136 tonnes of Gold worth around $70 billion to their reserves in 2022, according to data from the World Gold Council. This is the highest yearly purchase since records began. Central banks from emerging economies such as China, India and Turkey are quickly increasing their Gold reserves.

Gold has an inverse correlation with the US Dollar and US Treasuries, which are both major reserve and safe-haven assets. When the Dollar depreciates, Gold tends to rise, enabling investors and central banks to diversify their assets in turbulent times. Gold is also inversely correlated with risk assets. A rally in the stock market tends to weaken Gold price, while sell-offs in riskier markets tend to favor the precious metal.

The price can move due to a wide range of factors. Geopolitical instability or fears of a deep recession can quickly make Gold price escalate due to its safe-haven status. As a yield-less asset, Gold tends to rise with lower interest rates, while higher cost of money usually weighs down on the yellow metal. Still, most moves depend on how the US Dollar (USD) behaves as the asset is priced in dollars (XAU/USD). A strong Dollar tends to keep the price of Gold controlled, whereas a weaker Dollar is likely to push Gold prices up.