Gold (XAU/USD) extends its intraday retracement slide from a three-week top set earlier this Tuesday, and slips below the $4,700 mark heading into the European session. The downside, however, remains cushioned as traders keenly await the release of the latest US consumer inflation figures. In the meantime, the incoming negative headlines surrounding the Middle East crisis dampen hopes for a US-Iran peace deal and benefit the US Dollar’s (USD) reserve currency status. Furthermore, a diplomatic setback remains supportive of elevated Crude Oil prices, fueling inflationary concerns and bets for more hawkish central banks, including the US Federal Reserve (Fed). This contributes to a modest USD uptick and caps the non-yielding yellow metal.
In fact, US President Donald Trump dismissed Iran’s proposal to end a more than two-month-old conflict amid disagreements over Tehran’s nuclear program and a standoff over the critical Strait of Hormuz. Furthermore, CNN reported that Trump has grown impatient with the continued closure of the strategic waterway and also frustrated with how the Iranians are handling negotiations to end hostilities. Adding to this, some Trump aides say that he is now more seriously considering a resumption of major combat operations than he has in recent weeks. This sparks fears of a fresh escalation in the conflict and further benefits the USD, exerting some downward pressure on the Gold price.
Meanwhile, traders are still pricing in around a 25% chance that the US central bank will hike interest rates by the end of this year amid worries that the war-driven surge in energy prices will rekindle inflationary pressures. Hence, the market focus will remain glued to the crucial US Consumer Price Index (CPI), which should influence expectations about the Fed’s policy path and drive the USD demand. Nevertheless, hawkish Fed expectations turn out to be another factor that lends some support to the USD and contributes to the bullion’s intraday pullback from the $4,773-$4,774 region. The lack of follow-through selling, however, warrants caution before placing bearish bets on the Gold price.
XAU/USD 4-hour chart
Gold approaches 100-SMA pivotal support on H4, near $4,675
From a technical perspective, the XAU/USD pair showed some resilience below the 100-period Simple Moving Average (SMA) on the 4-hour chart on Monday. The subsequent rebound from the 38.2% Fibonacci retracement level of the April-May downfall and a breakout through the 61.8% Fibo. level favors bullish traders.
Meanwhile, momentum indicators hint that upside pressure is firm but not yet in a strong trending phase. In fact, the Relative Strength Index (RSI) around 58 suggests moderate bullish momentum, while the Moving Average Convergence Divergence (MACD) histogram is hovering just below zero.
On the topside, immediate resistance is aligned at the 61.8% Fibo. retracement around $4,742, with further hurdles at the 78.6% level near $4,807 and the recent swing high at $4,890. On the downside, initial support is seen at the 50.0% retracement near $4,696, followed by the 100-period SMA around $4,671 and the 38.2% retracement at approximately $4,651. A deeper setback would expose the 23.6% retracement near $4,594 and the structural floor around $4,503.
(The technical analysis of this story was written with the help of an AI tool.)
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it.
Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
