Gold bulls seem hesitant as hawkish Fed and Middle East jitters limit USD downside

• Gold attracts some buyers for the second straight day, though it lacks bullish conviction.
• Retreating US bond yields keep USD on the back foot and lend support to the commodity.
• The hawkish Fed and Middle East woes limit USD losses, capping the upside for the bullion.

Gold (XAU/USD) struggles to capitalize on a modest Asian session uptick on Friday and remains below the weekly top, touched the previous day amid mixed cues. US bond yields retreat further from multi-year highs as the recent pullback in crude oil prices helped alleviate immediate fears of runaway inflation. This, in turn, keeps US Dollar (USD) bulls on the back foot and supports the bullion. However, the US Federal Reserve's (Fed) hawkish outlook acts as a tailwind for the Greenback, holding back traders from placing aggressive bullish bets on the non-yielding yellow metal.

The US central bank voted unanimously to raise interest rates for the first time since 2023 at the end of the September meeting on Wednesday. Adding to this, the so-called dot plot revealed that Fed officials expect one more interest rate increase this year. At the post-meeting press conference, Fed Chair Kevin Warsh underscored the importance of stabilizing consumer prices to grow the US economy and said that inflation was too high for too long. Moreover, escalating tensions in the Middle East continue to support crude oil prices, fueling worries about energy-driven inflation and underpinning prospects for further Fed tightening.

UOB flags renewed Dollar upside as Fed hiking cycle widens US rate gap

Analysts at UOB Group highlight that the Federal Reserve’s return to a renewed hiking cycle is reshaping the Dollar outlook. They note that, “as we now expect two further Fed rate hikes, the narrowing of US rate differentials relative to G-10 peers – which have been weighing on the DXY since late 2024 – is likely to reverse and underpin the DXY going forward.” Against this backdrop, UOB now sees its previously cautious stance on the Dollar as increasingly challenged. “Putting this together, we now see upside risks to our USD forecasts against both G-10 and Asian currencies,” the bank says.

According to the CME Group's FedWatch tool, traders see a 54% chance of another Fed rate hike at the October meeting and the probability of a move in December stands at around 88%. This, along with geopolitical uncertainties, acts as a tailwind for the safe-haven USD, keeping a lid on the Gold price. In the latest development, Iran's Islamic Revolutionary Guard Corps (IRGC) said that it struck a Togo-flagged tanker that attempted an illegal passage through the Strait of Hormuz. Adding to this, US President Donald Trump said that he was approaching a major decision on whether to resume large-scale attacks on Iran. This, in turn, favors USD bulls.

Hence, it will be prudent to wait for strong follow-through buying before positioning for an extension of the precious metal's recovery from a six-week low, touched on Wednesday. Traders now look forward to Friday's second-tier US macro data – Industrial Production and Capacity Utilization Rate. Apart from this, speeches from influential FOMC members will drive the USD and provide some impetus to the Gold price later during the North American session. Traders will also take cues from further developments surrounding the Middle East crisis to grab short-term opportunities around the XAU/USD pair heading into the weekend.

XAU/USD daily chart

Technical Analysis

The XAU/USD pair fails near the 100-day Exponential Moving Average (EMA) at $4,368, which keeps the near-term bias tilted bearish despite staying above key Fibonacci support. The commodity hovers just above the 50.0% retracement at $4,320, which acts as a fragile floor after the recent pullback. Meanwhile, the Relative Strength Index (RSI) at 49.52 sits near neutrality, and the Moving Average Convergence Divergence (MACD) at -19.60 remains in negative territory, hinting that downside pressure still prevails.

This, in turn, suggests that the Gold price could face initial resistance at the 38.2% Fibonacci retracement at $4,408, followed by the 100-day EMA at $4,368, with stronger barriers emerging at the 23.6% retracement at $4,516 and the $4,692 swing high. On the downside, immediate support aligns at the 50.0% retracement at $4,320, ahead of deeper Fibonacci levels at $4,232 and $4,107, with the $3,947 zone marking a more distant structural floor should selling extend.

(The technical analysis of this story was written with the help of an AI tool. Know more.)