Gold Drops Toward Support as Fed Expectations Lift USD

Key Moments

Gold Stays Heavy as Market Watches $4,100 Support

Gold (XAU/USD) is trading with a soft tone ahead of the European session, holding close to the weekly low reached earlier this Wednesday. Sellers remain focused on whether the metal can decisively break and hold below the $4,100 level before seeking additional downside. Rising inflation concerns linked to swings in crude oil prices are bolstering expectations of further tightening by the US Federal Reserve (Fed). At the same time, a modest rebound in the US Dollar (USD) from the near three-week low seen on Tuesday is adding further pressure on the metal.

Oil Price Swings and US-Iran Headlines Shape Risk Backdrop

Crude oil registered a sharp intraday reversal on Tuesday from an over one-month high after renewed hopes for potential US-Iran peace talks. An unconfirmed report indicated that Qatar and Pakistan had proposed a compromise framework to Washington and Tehran that would satisfy both parties’ demands. Bloomberg subsequently reported that a diplomat involved in US-Iran talks pushed back on suggestions that a deal was near.

Separately, state media reported that Iranian Parliament Speaker Mohammad Bagher Ghalibaf told Pakistan’s Army Chief, Asim Munir, that the United States could not gain Iran’s trust unless it met previously stated requirements, including ending all hostilities and unfreezing Iranian assets. These comments dampened expectations for a swift diplomatic breakthrough.

Adding to tensions, Iran’s First Vice President stated that the country had no alternative but to exercise sovereignty over the Strait of Hormuz. That stance intensified concerns about potential crude supply disruptions and helped oil prices rebound quickly from their weekly low.

Fed Rate Path and Middle East Risks Support the Dollar

The rebound in oil prices comes on top of strong US inflation data released last week, reinforcing market expectations for another Fed rate increase. According to the CME Group’s FedWatch Tool, traders are currently assigning more than a 90% probability that the US central bank will raise borrowing costs again in December.

Ongoing uncertainty surrounding the Middle East situation is also underpinning demand for the safe-haven US Dollar. The firmer Greenback has been a key driver behind gold’s weakness for the fourth consecutive session and continues to argue for the potential for further declines in XAU/USD.

BNY Markets Sees December as Likely Final Hike

Analysts at BNY Markets underline that they “don’t expect an October rate hike next week, and market expectations agree,” noting that “at present the market is pricing only a 17% chance of a hike at the next FOMC.” Instead, they “do think December is the next likely opportunity for an increase in the federal funds rate and expect that to be the last hike in this cycle.” Looking further out the curve, BNY points out that “the implied federal funds rate for December 2027 is now only 4.64%, implying just under 75bp of additional rate hikes,” with these market expectations “actually slightly below their most hawkish levels from just a few weeks ago.”

Despite these expectations, investors may hesitate to take strong directional positions in gold ahead of key policy events. Market participants are expected to focus on the outcome of the two-day FOMC meeting on October 28 and the release of the US Personal Consumption Expenditures (PCE) Price Index, the Fed’s preferred inflation measure, on October 29.

In addition, next week’s policy decisions from several other major central banks – the Reserve Bank of New Zealand (RBNZ), the Bank of Canada (BoC), the European Central Bank (ECB) and the Bank of Japan (BoJ) – are likely to provide additional direction for non-yielding assets such as gold. Overall, the prevailing macro environment still favors XAU/USD sellers and indicates that the bias remains skewed to the downside.

Technical Picture: Bears Target Deeper Losses

The failed attempt overnight to push above the 100-period Exponential Moving Average (EMA) on the 4-hour chart, followed by renewed weakness, supports the bearish technical setup. The Moving Average Convergence Divergence (MACD) indicator remains in negative territory with a latest reading of -4.65, while the Relative Strength Index (RSI) stands at 39.16. This combination points to soft momentum without yet flagging oversold conditions.

A sustained break below $4,100 would reinforce the bearish bias and bring the monthly swing low near the $4,066 area into focus. Continued selling beyond that region could leave gold vulnerable to a sharper descent toward the $4,000 psychological level and then toward the year-to-date low in the $3,943-$3,942 band, which was reached in June.

On the upside, the 100-period EMA around $4,175 is likely to remain an initial, strong resistance barrier. A clear and sustained move above this level would be required to lessen the prevailing negative tone and potentially pave the way for a more durable recovery phase in XAU/USD.