Will Fed hike bets cap gold’s upside after its climb to $4,050 as USD pauses its hot CPI-led rally?

Gold posts modest gains on Wednesday, with hopes of diplomacy over Iran restraining the dollar’s sharp rally following US CPI data.
Expectations of steeper Fed tightening support USD bulls, potentially limiting bullion’s advance.
Conflicting technical signals also call for caution when taking positions for a substantial rise.

Dip buying lends support to Gold (XAU/USD) in Wednesday’s Asian session, taking prices towards $4,050 in the latest session and recouping some of the previous day’s steep decline. Hopes of US-Iran diplomacy interrupt the US Dollar’s (USD) advance, providing the commodity with some relief after Tuesday’s strong US inflation readings drove the currency to a near two-week high. Even so, bullish traders have reason to remain cautious: expectations of more aggressive policy tightening by the US Federal Reserve (Fed) should restrict any substantial gains in non-yielding bullion.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

Following a meeting of G7 foreign ministers in Paris on Tuesday, US Secretary of State Marco Rubio said the economic campaign against Iran was so devastating that major combat operations were not currently necessary. His remarks come as US President Donald Trump downplayed fears of escalation after the midterm elections. Speaking to reporters, Trump described fresh US attacks on Iran as highly unlikely and said negotiations to end the Middle East conflict had positive momentum. Iran, meanwhile, called on the US to fulfil its demands under a plan to reopen the Strait of Hormuz.

Prospects of a diplomatic breakthrough to end the US-Iran war are therefore generating optimism and curbing demand for the safe-haven Greenback. Countering that pressure is growing acceptance that the US central bank will increase borrowing costs in December, a view reinforced by Tuesday’s US Consumer Price Index (CPI) report and supportive of USD bulls. According to the US Bureau of Labor Statistics (BLS), headline CPI increased 0.4% in October, exceeding the market forecast of 0.3%. The core measure, excluding volatile food and energy prices, advanced 0.3%, equalling September’s rise and beating estimates of 0.2%.

A stronger-than-expected core CPI reading of 0.3% could lead Fed Governor Christopher Waller to consider a larger 50-basis-point (bps) rate rise at the December 8–9 policy meeting, he warned. Waller also argued that an increase of just 25 bps would endanger the Fed’s credibility. Philadelphia Fed President Anna Paulson, for her part, said restrictive policy must remain in place to bring inflation back to 2%. Dallas Fed President Lorie Logan suggested that interest rates may need to rise more quickly than previously envisaged. Together, these remarks support USD bulls and should constrain gold.

Does Waller’s December hike warning signal a stronger hawkish shift at the Fed?

A 9/10 FXS Speechtracker score, substantially above the historical average of 7.3/10, highlights the distinctly more hawkish tone of Fed Governor Waller’s remarks and his clear inclination towards further tightening. His support for a possible half-point rate increase in December is conditional on October core CPI coming in around 0.3% or higher. Combined with his backing for at least a quarter-point rise even if the data improve, this points to a forceful policy response to any indication that US inflation is moving away from target. Waller’s focus on widespread price rises, anticipated additional pressure from producer prices and energy, and his assessment that policy has not been sufficiently restrictive all strengthen upside risks to US Treasury yields and short-term interest rates.

Further evidence of the hawkish shift came from the FXS Fed Sentiment Index, which climbed 3.17 points to 145.50, in line with the high FXS Speechtracker score. Its position well above the neutral 100 threshold suggests markets are likely to assign greater odds to additional Fed tightening, lending support to the US Dollar against lower-yielding currencies.

What does the XAU/USD 1-hour chart show?

Technical Analysis: Can Gold Extend Its Recovery?

Resilience in XAU/USD below the 200-hour Simple Moving Average (SMA), near $4,024, points to underlying support for the trend. Yet the precious metal is still trading below the 23.6% Fibonacci retracement at $4,080. After repeated recent failures around horizontal resistance at $4,150, the near-term outlook consequently remains broadly neutral. A Relative Strength Index reading around 41 indicates only limited exhaustion in selling pressure. At the same time, the Moving Average Convergence Divergence (MACD) moving back into positive territory points to weakening bearish momentum rather than a decisive bullish push.

Further gains could therefore encounter resistance around the 23.6% Fibonacci retracement at $4,080. A break above that level could take Gold towards the $4,145-$4,150 zone, where stronger selling interest could emerge. Initial support on a decline lies at the 50.0% retracement of $4,008, followed by the 61.8% Fibonacci level at $3,975. Further support is located at $3,929 and around the cycle low near $3,870.

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

Gold: Frequently Asked Questions

What makes Gold an investment choice?

Throughout human history, Gold has served extensively as both a store of value and a medium of exchange, giving it an important role. Today, its appeal extends beyond its lustre and use in jewellery: the precious metal is widely regarded as a safe-haven asset and, as such, a good investment during periods of uncertainty. Since it is not dependent on a particular issuer or government, Gold is also commonly viewed as protection against inflation and currency depreciation.

Which buyers hold the largest Gold reserves?

The largest holders of Gold are central banks. To support their currencies during unsettled periods, they typically diversify reserves and purchase Gold, seeking to strengthen perceptions of both the economy and the currency. Substantial Gold holdings can bolster confidence in a country’s solvency. World Gold Council data show that central banks increased their reserves by 1,136 tonnes of Gold, valued at around $70 billion, in 2022. No other year since records began has seen purchases on that scale. Emerging-economy central banks, including those in China, India and Turkey, are rapidly expanding their Gold reserves.

How does Gold move relative to other assets?

Both the US Dollar and US Treasuries are major reserve and safe-haven assets, and Gold has an inverse relationship with them. A weakening Dollar generally coincides with rising Gold prices, allowing investors and central banks to diversify their holdings during turbulent periods. Gold also tends to move in the opposite direction to risk assets. Stock market advances usually put pressure on Gold prices, whereas selling in riskier markets generally supports the precious metal.

Which factors drive Gold prices?

A broad set of influences can affect Gold prices. Its safe-haven appeal means geopolitical turmoil or concerns over a severe recession can trigger a rapid rise. Because Gold offers no yield, lower interest rates generally support it, while a higher cost of borrowing usually weighs on the metal. Nevertheless, the US Dollar’s (USD) performance drives most price movements, as Gold is quoted in dollars (XAU/USD). Dollar strength typically limits Gold prices, while a weaker Dollar is likely to lift them.