Gold (XAU/USD) extended its decline for a second session, sliding to a one-week low near $4,575 in early European trade on Wednesday. Demand for the US Dollar (USD) has been supported by persistent geopolitical uncertainty, while inflation concerns have encouraged expectations of more hawkish central banks, including the US Federal Reserve (Fed), drawing flows away from the non-yielding metal. In the Middle East, US forces said they carried out self-defence strikes in southern Iran on Monday against missile sites and boats attempting to lay mines, as Tehran criticised the action as a breach of a ceasefire in place since early April and the IRGC warned of a right to retaliate.
The stand-off, alongside the effective closure of the Strait of Hormuz and a US blockade of Iranian ports, has underpinned crude oil and added to inflation fears. Against that backdrop, the RBA raised rates in May, and markets expect the ECB, BoJ and RBNZ to lift rates by year-end, while traders are pricing roughly a 50% chance of a Fed hike by December. With no major US data due on Wednesday, attention turns to FOMC remarks, as well as Thursday’s US PCE Price Index and the second estimate of US GDP. Technically, XAU/USD has struggled near $4,580, which aligns with the 100-period EMA on the four-hour chart; RSI is around 41 and MACD remains negative, while a break below $4,450 would deepen the correction.
Geopolitical Uncertainty and Inflationary Pressures Drive Gold Lower
We are seeing gold face pressure, dropping to a one-week low near the $4,575 area. This weakness is driven by a strong US Dollar, which is benefiting from ongoing geopolitical uncertainty. These factors are currently driving money away from the yellow metal.
The conflict between the US and Iran is a key factor supporting the dollar’s safe-haven status and weighing on gold. The CBOE Volatility Index (VIX) has reflected this uncertainty, recently ticking up to 14.5, showing a rise in market anxiety. This geopolitical risk premium seems firmly attached to the dollar for now.
With tensions potentially affecting oil supplies from the Strait of Hormuz, we see persistent inflation fears. The latest US Consumer Price Index (CPI) report, which came in at 3.6% year-over-year, reinforces the view that the Fed will remain hawkish. Markets are now pricing in a 55% probability of a Fed rate hike by December, which increases the opportunity cost of holding non-yielding gold.
We are positioned cautiously ahead of Thursday’s key data releases, including the US PCE Price Index and the GDP report. These figures will be crucial in shaping the Fed’s next move and could spark significant volatility in the market. Until then, we expect traders to avoid taking large positions on gold.
Bearish Technicals and Potential Trading Strategies
Given the bearish technical outlook, we are considering strategies that profit from a potential drop in gold prices. Buying put options with strike prices below the current level could be an effective way to position for a break of the $4,450 support. The key resistance at the $4,580 level appears to be a strong ceiling for now.
For those with a slightly less bearish view, selling out-of-the-money call spreads with a short strike above the $4,580 resistance could also be a viable strategy. This approach would benefit from either a fall in price or sideways consolidation, collecting premium as time passes. However, any sustained move above that resistance level would signal that we need to reassess our bearish stance.
