Gold (XAU/USD) held modest gains above $5,000 in early European trade, but price action stayed cautious amid mixed drivers. Geopolitical risk remained present as Israel expanded ground operations in southern Lebanon while signs emerged that the US-Israeli war on Iran may be nearing an end. As the conflict entered its third week, Iran continued attacks on civilian infrastructure in six Gulf states, including airports, ports, oil facilities, and commercial hubs, using missiles and drones. Disruption to shipping through the Strait of Hormuz, which carries a fifth of global oil supply, kept crude prices elevated and added to inflation concerns.

Inflation And Fed Expectations

Higher inflation risks could lead the US Federal Reserve to keep rates higher for longer, or consider rate rises, which can weigh on non-yielding gold. Demand for the US Dollar increased after a pullback from its highest level since May 2025, also limiting upside in XAU/USD. Markets awaited the outcome of a two-day FOMC meeting on Wednesday, alongside policy updates from the ECB, BoJ, and BoE later in the week. Technical signals stayed negative: price broke the 200-period SMA on the 4-hour chart and sat below the 38.2% Fibonacci level, with MACD (12, 26, 9) below zero and RSI at 41. Resistance stood near $5,040, then $5,063, with $5,186 above. Support was at $5,000, then $4,995–$4,985, with $4,921.41 below. The current situation is extremely tense, as safe-haven demand from the Middle East war is directly clashing with a hawkish Federal Reserve. We saw a similar dynamic back in early 2022 when the Ukraine invasion began, where gold initially spiked before succumbing to aggressive Fed rate hikes. Given gold is already above $5,000, we need to be cautious that the Fed’s inflation fears could easily outweigh the geopolitical bid. This level of uncertainty suggests implied volatility is the most important factor to watch. The CBOE Volatility Index (VIX) has likely surged past 40, a level historically associated with major market stress, and we should assume options premiums on gold futures are extremely expensive. Therefore, simply buying calls or puts is a high-risk strategy that could see its value decay quickly if the conflict news stagnates.

Oil Shock And Market Stress

The disruption at the Strait of Hormuz, which handles over 20% of the world’s daily oil supply, is the primary driver of the Fed’s inflation fears. The last time we saw a prolonged closure in the late 1970s during the Iranian Revolution, oil prices nearly tripled and fueled a decade of global stagflation. This historical precedent is exactly what the FOMC is looking at, making a surprise rate hike a real possibility this week. With the US Dollar Index (DXY) pushing multi-year highs seen in May 2025, we are getting a clear signal that markets are prioritizing yield and safety in the dollar over gold. A strong dollar makes gold more expensive for foreign buyers and acts as a significant headwind. We must respect this inverse relationship, which has historically been a powerful force in precious metals markets. Given the upcoming FOMC meeting and conflicting market drivers, we should consider strategies that profit from a large price move in either direction. Setting up long strangles, which involve buying an out-of-the-money call and an out-of-the-money put, would allow us to capitalize on a significant breakout or breakdown following the central bank announcements. This defines our maximum risk while giving us exposure to the explosive volatility. We can use the key technical levels to structure these trades. For instance, buying puts with a strike below the $4,985 support and calls with a strike above the $5,063 resistance level would be a classic volatility play. The goal is not to predict the direction but to position ourselves for the inevitable sharp move once the market digests this week’s central bank decisions. Create your live VT Markets account and start trading now.

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