Gold drops to nearly two-week low as hawkish Fed bets rise amid oil-driven inflation fears

Gold (XAU/USD) attracts fresh sellers following an intraday uptick to the $4,472 region and drops to a one-and-a-half-week low during the Asian session on Monday. Traders ramped up bets for an interest rate hike in reaction to Federal Reserve (Fed) Chair Kevin Warsh's remarks on curbing inflationary pressures on Friday, which, in turn, continues to undermine the non-yielding bullion. However, modest US Dollar (USD) weakness helps the precious metal show some resilience below the $4,400 mark and trim a part of its intraday losses.

Speaking at the Fed’s annual symposium in Jackson Hole, Wyoming, Warsh acknowledged that inflation is running hot and also hinted that interest rates could need to move higher if more progress isn’t made on easing price pressures. Traders were quick to react and are now pricing in around a 60% chance that the US central bank will raise borrowing costs in September. Moreover, CME Group's FedWatch Tool indicates an 88% probability of a December increase, which lifted the USD to a two-week high on Friday and led to an over 3% fall in the Gold price.

The selling bias remains unabated at the start of a new week as escalating US-Iran tensions lift crude oil prices and fuel inflation fears, bolstering hawkish Fed expectations. US forces struck two rocket launchers on Iran’s Larak Island in the Strait of Hormuz on Sunday, the first American strikes on the Islamic Republic since late July, prompting Iran to retaliate by launching ballistic missiles at two US bases in Jordan. Moreover, US Treasury Secretary Scott Bessent said that new secondary sanctions were likely to be unveiled weekly in the effort to pressure Iran.

Despite the supportive fundamental backdrop, the safe-haven USD struggles to attract any follow-through buying amid soft US Treasury bond yields. This, in turn, holds back traders from placing fresh bearish bets on the Gold price and helps limit the downside. Nevertheless, the aforementioned fundamental backdrop seems tilted in favor of USD bulls, suggesting that any recovery in the XAU/USD pair is likely to be sold into. Traders now look to key US macro releases, scheduled for the start of a new month, including the Nonfarm Payrolls (NFP) report on Friday.

XAU/USD 4-hour chart

Technical Analysis

Friday's break below the 100-period Simple Moving Average (SMA) on the 4-hour chart, for the first time since early August, was seen as a key trigger for bearish traders. Moreover, the commodity is now trading below the 38.2% Fibonacci retracement of the rally from late July lows, validating the near-term negative outlook. Meanwhile, the Moving Average Convergence Divergence (MACD) indicator remains deeply negative, while the Relative Strength Index (RSI) sits in oversold territory near 25, hinting at persistent downside pressure even if a short-lived corrective bounce cannot be ruled out.

Hence, a subsequent fall towards the next relevant support at the 50.0% retracement near $4,346.16, ahead of the 61.8% level at $4,263.27, looks like a distinct possibility. A break below the latter would expose deeper structural floors at $4,145.27 and $3,994.96. On the topside, immediate resistance is seen at the 38.2% retracement at $4,429.04, followed by the 100-period SMA around $4,475.07 and the 23.6% Fibo. level near $4,531.59, while the cycle high at $4,697.36 marks a more distant barrier for any sustained recovery.