Gold (XAU/USD) builds on the previous day’s goodish recovery from a nearly four-week low, and attracts some follow-through buyers for the second straight day on Thursday. Retreating US bond yields, along with Wednesday’s soft US ADP report, weigh on the US Dollar (USD) and lift the commodity back closer to $4,450 during the Asian session. That said, firming US Federal Reserve (Fed) rate-hike expectations and inflation risks stemming from higher energy prices could act as a tailwind for US bond yields. Moreover, geopolitical uncertainties could support the safe-haven USD, warranting caution before positioning for any further appreciation in the precious metal.
According to CME Group’s FedWatch Tool, traders are pricing in around a 62% chance that the US central bank will hike rates at its upcoming September 15-16 policy meeting. The expectations were lifted by Fed Chair Kevin Warsh’s hawkish remarks last Friday. Moreover, worries that rising energy prices will rekindle inflationary pressures back the case for Fed tightening, which could limit the USD’s corrective slide and cap the non-yielding bullion. In fact, crude oil prices trade near the highest level since July 24, touched on Wednesday, as tensions between the US and Iran have flared up after fresh US strikes on Iranian targets and retaliatory drone and missile attacks by Tehran across the Gulf region.
Furthermore, US President Donald Trump said on Wednesday that he is prepared to launch another attack on Iran. This, along with continued clashes over the Strait of Hormuz, keeps the geopolitical risk premium in play, which should continue to support oil prices and the USD. Hence, it will be prudent to wait for strong follow-through buying before confirming that the Gold price has bottomed out in the near term and placing fresh bullish bets. Traders might also opt to wait for the release of the crucial US Nonfarm Payrolls (NFP) report on Friday, which will be looked at for more cues about the Fed’s future policy path and help in determining the next leg of a directional move for the XAU/USD pair.
XAU/USD 4-hour chart
Technical Analysis
The overnight close above the 23.6% Fibonacci retracement level of the recent corrective slide from an over three-month peak, set in August, and the subsequent move up back the case for further gains. That said, the 38.2% retracement at $4,438 is the first cap, reinforcing the idea of a corrective bounce within a broader downside phase. Furthermore, the Moving Average Convergence Divergence (MACD) indicator turns positive and the Relative Strength Index (RSI) hovers near 49, hinting at stabilizing but not yet bullish momentum.
A move beyond the 38.2% Fibonacci level, however, should pave the way for a move toward the 100-period SMA at $4,480, the 50.0% retracement at $4,487, the 61.8% level at $4,535, and, later, $4,604 and $4,692. On the downside, immediate support emerges at the 23.6% retracement at $4,378, while a deeper pullback would expose the Fibonacci-derived structural floor near $4,282.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money.
When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions.
The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system.
It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.