Gold rebounded as the US Dollar eased after reports of a possible US-Iran extension of the current truce and softer inflation data. XAU/USD traded near $4,480 after an intraday low of $4,366, the weakest level in two months. Axios said a preliminary 60-day arrangement had been reached but was awaiting approval from President Donald Trump, following a second US “defensive” strike this week on Iranian facilities and an IRGC claim of retaliatory targeting of a US Gulf airbase. The Dollar’s pullback left DXY around 99.00 after an earlier seven-week high of 99.54.
Core PCE rose 0.2% MoM in April, slowing from 0.3% in March, while the annual rate edged up to 3.3% from 3.2%. Diplomatic talks continued to face obstacles over Iran’s nuclear programme and the Strait of Hormuz, while Tehran sought sanctions relief and access to frozen assets; Trump said no relief would be offered for giving up highly enriched uranium. Gold also drew pressure from elevated US Treasury yields as higher energy costs sustained inflation concerns; Fed Vice Chair Philip Jefferson cited energy prices as a risk to growth and inflation, and reiterated a 2% target, calling activity “robust”. Technically, XAU/USD bounced off the 200-day SMA at $4,399, with RSI near 40 and MACD negative; resistance sits at the 50-day SMA near $4,630 and the 100-day at $4,801.
Monetary Policy and Limited Gold Rally Potential
Given the Federal Reserve’s firm stance on inflation, we believe gold’s potential for a major rally is limited in the near term. With the Fed Funds Rate still holding firm above 4.5% and Core PCE at 3.3%, conditions are not yet in place for a significant policy shift. The CME FedWatch Tool is currently pricing in less than a 20% chance of a rate cut by the September 2026 meeting, which should continue to support the US Dollar.
Geopolitical Risks, Trading Strategy, and Dollar Strength
The developing situation between the US and Iran introduces significant headline risk and a potential for sharp, unpredictable moves. A breakdown in the truce talks could send gold higher as a crisis hedge, a scenario for which we must be prepared. Historically, military escalations in the Strait of Hormuz have led to oil price spikes of over 10% in a matter of days, which would have inflationary knock-on effects and create flight-to-safety flows.
For now, our base case is that gold remains capped, making selling premium an attractive strategy. We are considering initiating bear call spreads, targeting strikes above the 50-day moving average near $4,630 to capitalize on the bearish technical outlook. This defined-risk strategy allows us to profit if gold trades sideways or drifts lower in the coming weeks.
At the same time, we see value in purchasing some cheap, out-of-the-money call options with July or August expirations as a low-cost hedge against a sudden geopolitical flare-up. The potential for the truce to fail is a real, if unquantifiable, risk that could quickly invalidate the current bearish trend. This approach allows us to maintain a core bearish position while protecting against a sudden reversal driven by news events.
The US Dollar’s role as the preferred safe-haven asset remains a key headwind for gold. The dollar’s strength is reinforced by recent global PMI data, which showed manufacturing activity in both Europe and China contracting for a third consecutive month. This economic divergence, with the US economy remaining relatively robust, will likely continue to attract capital flows into dollar-denominated assets, further weighing on gold prices.
