Gold Struggles as Strong Dollar, Fed Outlook Weigh

Key Moments

Macro Drivers Support the Dollar, Contain Gold’s Upside

Gold (XAU/USD) pared early gains on Thursday, trading close to $4,125 during the early European session, up around 0.35% on the day. The advance from the two-month low reached the previous day remained constrained as the US Dollar (USD) retained a constructive tone.

The latest minutes from the September 15-16 Federal Open Market Committee (FOMC) meeting, released on Wednesday, showed a unanimous vote to raise the federal funds rate target range and indicated a bias toward additional tightening. Most participants judged that another rate increase would likely be appropriate by year-end to address persistent inflation pressures. Even so, the hawkish message did not significantly alter prevailing expectations that the Federal Reserve (Fed) will leave rates unchanged at its next meeting in October, which lent some support to non-yielding gold.

According to the CME Group’s FedWatch Tool, market participants continued to assign roughly an 80% probability that the US central bank will raise borrowing costs in December. At the same time, concerns that inflation could remain sticky amid volatile energy prices helped keep US Treasury yields anchored near multi-year highs. Elevated yields, combined with ongoing geopolitical uncertainty, underpinned the safe-haven Greenback and curbed any meaningful follow-through rally in gold.

Geopolitical Tensions in the Middle East Bolster Safe-Haven Demand

Persistent geopolitical risks from the conflicts in the Middle East remained an important backdrop for currency and commodity markets. In recent developments, the Pentagon reportedly instructed US Central Command (CENTCOM) several days ago to finalize preparations for resuming major combat operations in Iran, as US President Donald Trump considers a specific date for potential strikes.

US and Israeli sources indicated that such actions could occur before the US midterm elections and possibly ahead of the Israeli elections scheduled a week earlier, heightening the probability of further escalation in the region. This scenario supported the case for USD dip-buying on pullbacks, reinforcing the Dollar’s safe-haven appeal and indirectly limiting upside potential for gold.

Given this backdrop, traders appeared cautious about aggressively adding to long gold positions without clear evidence of sustained buying interest that could confirm a near-term bottom in XAU/USD.

Data, Fed Speakers, and Headlines in Focus

Market participants turned their attention to the upcoming release of the Weekly Initial Jobless Claims figures from the United States, which, alongside remarks from influential FOMC members, were expected to guide the near-term direction of the USD. These catalysts, combined with ongoing geopolitical news flow, were likely to generate volatility across global financial markets and create short-term trading opportunities in the XAU/USD pair.

However, the prevailing fundamental setup – characterized by firm US yields, a hawkish Fed bias, and elevated geopolitical risk supporting the Dollar – continued to argue for caution on expectations of a sustained gold rally.

Technical Picture: Bearish Bias Despite Support Above Key Fib Levels

On the daily chart, XAU/USD has been attempting to stabilize below the 78.6% Fibonacci retracement of the June-August advance, but the broader technical tone remained negative. The pair was trading beneath key daily Simple Moving Averages (SMA), pointing to a bearish near-term structure.

Momentum indicators reinforced this view. The Relative Strength Index (RSI) hovered near 40, while the Moving Average Convergence Divergence (MACD) stayed in negative territory, indicating that selling pressure continued to dominate even in the absence of deeply oversold readings.

Key Technical Levels for XAU/USD

Any sustained move higher faced a series of nearby resistance barriers, while support levels below helped to define the downside risk profile.

The cluster of resistance formed by the 61.8% retracement at $4,233, the 50% level at $4,320, and the 50-day SMA at $4,332 created a notable supply zone that could challenge any further rebound. Above that area, additional hurdles were located at the 38.2% retracement at $4,408 and the 23.6% retracement at $4,516.

On the downside, the 78.6% Fibonacci level at $4,108 provided initial support ahead of the previous cycle low near $3,949. A decisive break below these supports would signal renewed downside momentum, while a strong bounce and sustained buying above the outlined resistance band would be needed to shift the near-term outlook in favor of gold bulls.

Interest Rates and Their Role in Gold and FX Markets

Interest rates represent the cost charged by financial institutions on loans and the return paid to savers and depositors. They are influenced by base lending rates set by central banks in response to economic developments. Central banks typically operate with a mandate to maintain price stability, often interpreted as targeting a core inflation rate of around 2%.

When inflation drops below the desired level, central banks may lower base lending rates to encourage borrowing and support economic activity. Conversely, a significant rise in inflation above 2% generally prompts central banks to increase base rates in an attempt to cool price pressures.

Higher interest rates usually support a country’s currency, as they make assets denominated in that currency more attractive to global investors. In currency markets, this dynamic often results in a stronger exchange rate when interest rates are raised or expected to rise.

For gold, higher interest rates tend to be a headwind. They increase the opportunity cost of holding gold rather than interest-bearing instruments or cash deposits. Elevated rates also commonly support the US Dollar, and since gold is priced in USD, a stronger Dollar typically weighs on gold prices.

The Fed funds rate is the overnight rate at which US banks lend reserves to one another and is the headline rate set by the Federal Reserve at FOMC meetings. It is expressed as a range, such as 4.75%-5.00%, with the upper bound – in this example 5.00% – often cited as the reference figure. Market expectations for future Fed funds rates are tracked by the CME FedWatch Tool, which in turn influences behavior across a wide array of financial markets as participants position around anticipated Fed policy decisions.