Gold (XAU/USD) fell to about $4,235 in early Asian trading on Wednesday, its lowest level since 23 March, extending a decline driven by fresh Middle East tensions and firmer pricing for a US interest-rate increase this year. Attention later in the session turns to the US May Consumer Price Index (CPI) release, which could reset expectations for policy and the dollar.
Reuters reported that the US carried out strikes against Iran after President Donald Trump said Tehran had shot down a US Apache helicopter in the Strait of Hormuz, even as he separately said the two sides were close to an agreement following a fragile ceasefire in early April. Markets are also reacting to stronger-than-expected US May jobs data, while the May CPI is forecast at 4.2% year on year versus 3.8% in April; core CPI is seen at 2.9% versus 2.8%. Hotter inflation could lift the greenback and add pressure to the USD-priced metal, which offers no yield and has also breached its 200-day moving average.
Fed Policy Expectations and Market Reactions
We are seeing gold prices pull back from recent highs, now trading around the $2,315 mark. This downward pressure is mainly because markets are adjusting their expectations for when the Federal Reserve will begin cutting interest rates. The key event everyone is watching this week is the Consumer Price Index (CPI) inflation report, which will heavily influence the Fed’s next move.
The strong jobs report for May, which added 272,000 jobs, has convinced many that the economy is too hot for the Fed to consider cutting rates soon. This strength pushes up the value of the dollar and bond yields, making a non-yielding asset like gold less appealing. Historically, gold tends to struggle when interest rate expectations are firm or rising.
Inflation Data and Near-Term Outlook for Gold
This Friday’s CPI report is the next major hurdle. After April’s headline inflation came in at 3.4%, any number that comes in hotter than expected could cause another significant sell-off in gold. We believe traders are positioning for this possibility, anticipating further strength in the US dollar.
While ongoing geopolitical tensions typically support gold, this factor is currently taking a backseat to central bank policy. Much like we saw during the rate hike cycle of 2022-2023, the market is more focused on inflation and the Fed’s response. This means that even with global uncertainty, the path of least resistance for gold in the near term appears to be lower.
Given this outlook, we feel it is prudent for derivative traders to consider buying put options to hedge against a potential drop below the $2,300 support level, especially ahead of the inflation data. This negative sentiment is growing as the probability of a rate cut in the near future diminishes. Any break of significant technical levels, like the 50-day moving average, would confirm this bearish view.
