Gold rose more than 1.50% on Friday as reports said Iran and the US were close to a deal to extend the ceasefire for 60 days and enable talks on Iran’s nuclear programme. XAU/USD was trading at $4,563 after rebounding from $4,489. Sources said the Strait of Hormuz would reopen if an agreement is reached and the US Navy would lift its blockade, while Reuters cited an Iranian source saying a political understanding has been reached but is not finalised. Oil weakened in tandem, with WTI down over 1.50%, a move that would cool energy-led inflation and reduce pressure on central banks considering tighter policy.
US data showed the trade deficit narrowed and Midwest activity returned to growth, as the Chicago PMI rose to 62.7 in May from 49.2 and beat the 50.5 forecast. Earlier figures put first-quarter 2026 GDP at 1.6%, revised down from 2%, while the Fed’s core PCE Price Index rose 3.3% YoY in April versus 3.2% in March. Rate expectations shifted, with markets implying around 42% odds of a hike. Technically, gold reclaimed $4,500; resistance sits at the 20-day SMA of $4,588, then $4,600, the 50-day SMA at $4,630 and the 100-day SMA at $4,798, while support is seen at $4,450, the 200-day SMA at $4,399 and $4,366.
Interest Rate Expectations and Gold’s Appeal
We see the recent jump in gold as a reaction to changing interest rate expectations, not a typical flight to safety. The potential for a US-Iran ceasefire is lowering oil prices, which in turn reduces the pressure on the Federal Reserve to raise rates. This makes holding a non-yielding asset like gold more appealing for the coming weeks.
This shift is reflected in the bond market, where we’ve seen U.S. 10-year Treasury yields fall 15 basis points this week to 4.35%. Fed funds futures now imply just a 42% chance of a rate hike at the next meeting, a significant drop from nearly 70% just last week. This market pricing strongly suggests traders anticipate a more dovish Fed stance if geopolitical tensions ease.
Given the upcoming Nonfarm Payrolls and ISM data, we anticipate heightened volatility. We believe buying call options on gold ETFs or futures offers a defined-risk way to capitalize on further upside if the data comes in weak, reinforcing the idea the Fed will pause. This strategy allows for participation in a rally while limiting potential losses if the narrative suddenly changes.
Risks, Historical Context, and Market Indicators
However, we must remain cautious as the situation is fluid and Fed officials are giving mixed signals. If the ceasefire deal fails or May’s payroll report comes in unexpectedly strong, rate hike odds will soar again, putting immediate downward pressure on gold. A clear break below the $4,500 level would be our signal that this bullish move has run its course.
Historically, we have seen similar patterns where the removal of a geopolitical risk premium causes the market to refocus entirely on central bank policy. During previous periods of easing Mideast tensions, gold’s ultimate direction was dictated by the Federal Reserve’s interest rate cycle, not the fading conflict. We expect this dynamic to play out again over the next month.
We are also closely watching the US Dollar Index (DXY) for confirmation of this trend. A weakening dollar alongside falling oil prices would provide a strong tailwind for gold. If the DXY breaks below its recent support at 104.20, it would reinforce our view that gold is targeting its next resistance level near the $4,588 moving average.
