$4,050: Gold struggles as expectations of a Fed rate hike strengthen

Further Fed rate hikes remain a drag on sentiment, leaving Gold stable but short of momentum.
A December Fed rate hike is fully priced in, while markets also consider a larger 50 bps increase.
Below its 21-day SMA, XAU/USD continues to struggle, leaving the short-term technical bias bearish.

Gold (XAU/USD) is up 0.47% on Wednesday at the time of writing. Trading around $4,050, the metal is holding steady after Tuesday’s 2.67% decline. That fall followed stronger-than-forecast US consumer inflation and hawkish comments from Federal Reserve (Fed) officials, which reinforced expectations of a more aggressive path of interest rate increases.

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

October’s US Consumer Price Index (CPI) increased 0.4% MoM, exceeding the 0.3% forecast but slowing from September’s 0.6%. Excluding food and energy, core CPI advanced 0.3%. That matched September’s rate and surpassed expectations of 0.2%.

Despite the smaller monthly increase, Commerzbank economists warn that “prices are still rising too quickly, even though the increase was somewhat smaller than in September.” Their concern centres on the underlying trend: “core inflation, a key gauge of the underlying trend, thus remains (too) high and is no longer trending downward,” they note. Looking ahead, they judge that “the strong economy and the ongoing conflict in the Middle East suggest that inflation is unlikely to ease in the near term.”

50 bps hike gains attention after hawkish Fed signals

A half-point increase in December may be necessary if October core CPI is “around 0.3% or higher.” That was the message from Fed Governor Christopher Waller before the data release. As inflation reached that threshold, traders began factoring in the possibility of a larger increase at the December meeting.

Support for additional monetary tightening also came from Dallas Fed President Lorie Logan and Philadelphia Fed President Anna Paulson, among other Fed officials. Separately, Fed Vice Chair for Supervision Michelle Bowman emphasised the importance of bringing inflation under control.

According to the CME FedWatch Tool, markets assign an 88.5% probability to a 25-basis-point (bps) increase in December and an 11.5% probability to a 50 bps hike, fully pricing in a Fed rate rise. Expectations extend into next year: traders have priced in three further quarter-point increases by mid-2027.

Rate-hike bets lift US Dollar and Treasury yields

As rate expectations shifted, demand for the US Dollar (USD) strengthened and US government bonds sold off sharply, with short-dated debt bearing the brunt. On Tuesday, the policy-sensitive 2-year Treasury yield surged around 19 bps. The benchmark 10-year yield gained roughly 14 bps over the session and briefly returned above 5%.

With Veterans Day keeping the US bond market shut on Wednesday, the Greenback is extending its advance. The US Dollar Index (DXY) stands around 102.50, closing in on October’s year-to-date peak of 102.94.

Near-term pressure on Gold is likely to persist as the US Dollar strengthens, Treasury yields stay elevated and expectations of further Fed tightening build. Over a longer horizon, however, strong central bank purchases and continued inflows into Gold-backed exchange-traded funds (ETFs) could maintain a structural floor for the metal.

Technical Analysis: Key daily SMAs keep Gold under bearish pressure

Trading beneath the 21-day Simple Moving Average (SMA) at $4,058 and both the 50-day and 100-day SMAs, XAU/USD retains a bearish daily-chart bias. Momentum is neutral on the Relative Strength Index (RSI), which sits around 47. The Moving Average Convergence Divergence (MACD) is still positive, but shrinking green histogram bars point to fading bullish momentum.

The first upside hurdle is the 21-day SMA near $4,058. Beyond it, resistance lies at the 50-day SMA of $4,178 and the 100-day SMA of $4,201, where sellers are likely to protect the recent range highs. Initial support sits at the psychological $4,000 mark, ahead of the yearly low at $3,870.23. A clear breach of that low could leave Gold vulnerable to additional selling.

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

Gold: Key questions answered

What attracts investors to Gold?

Widely used to preserve value and facilitate exchange, Gold has occupied an important place throughout human history. Today, its appeal goes beyond its lustre and use in jewellery. The precious metal is broadly regarded as a safe-haven asset, making it a favoured investment during periods of turbulence. Because it is not dependent on a particular issuer or government, Gold is also commonly viewed as a hedge against inflation and currency depreciation.

Which buyers hold the most Gold?

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

How does Gold move relative to other assets?

Both the US Dollar and US Treasuries are major reserve and safe-haven assets, and Gold is inversely correlated with them. A weakening Dollar generally supports Gold, 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 gains typically weigh on the metal, whereas selling in riskier markets tends to support it.

Which factors drive Gold prices?

A broad set of influences can shift Gold prices. Its safe-haven appeal means geopolitical disruption or concerns about a severe recession can trigger rapid gains. Gold pays no yield, so falling interest rates generally support it, while a higher cost of money typically puts it under pressure. Even so, movements in the US Dollar (USD) drive most price changes because the metal is quoted in dollars (XAU/USD). Dollar strength tends to restrain Gold prices; a weaker Dollar is more likely to lift them.