Gold struggles near $3,900 as traders assess Middle East developments,US election risks

• Gold struggles to extend its recovery as Oil rebounds and Fed expectations remain hawkish.
• Traders focus on US midterm elections and employment data for fresh direction.
• Bearish momentum leaves Gold vulnerable to a retest of the $3,870 yearly low.

Gold (XAU/USD) loses momentum on Tuesday as Oil prices rebound after the Wall Street Journal (WSJ) reported a US strike on Iran’s Qeshm Island, dampening optimism over diplomatic efforts that had sent energy prices sharply lower the previous day. At the time of writing, XAU/USD trades around $3,900, down 1% on the day.

Oil prices remain volatile as traders react to shifts in the news flow. West Texas Intermediate (WTI) trades around $97, up 2.23%, after losing nearly 7% on Monday.

The link between Oil prices and interest rate expectations has remained a key driver for Gold since the war began in late February. Higher energy costs add to inflationary pressure, prompting central banks, particularly the Federal Reserve (Fed), to keep interest rates elevated or tighten monetary policy further. Higher borrowing costs tend to weigh on the precious metal by increasing the opportunity cost of holding an asset that offers no yield.

The Fed raised interest rates by 25 basis points (bps) in September before pausing in October, while reaffirming its commitment to restoring price stability. This leaves the door open to additional rate hikes, with the CME FedWatch Tool showing a 75% chance of an increase in December.

Middle East uncertainty, higher Oil prices and a hawkish Fed outlook continue to support demand for the US Dollar (USD), despite its modest retreat from recent highs, adding another headwind for Gold. The US Dollar Index (DXY), which tracks the currency against six major peers, trades around 101.81.

Against this backdrop, Gold has limited scope for recovery without a sustained decline in Oil prices. Such a decline appears uncertain in the near term, given the lack of clarity surrounding US-Iran negotiations. The metal is also vulnerable to further liquidation, as concerns over AI spending weigh on technology stocks and lead some investors to sell Gold to cover losses and meet margin calls.

Traders now turn to a busy week of US employment data, starting with JOLTS Job Openings on Tuesday and ending with Nonfarm Payrolls (NFP) on Friday. Attention also centres on Tuesday’s US midterm elections, which could influence the direction of the US Dollar.

Dollar outlook tied to US midterm outcome and Iran risk

Commerzbank’s Norman Liebke argues that a scenario in which “the Republicans lose their majorities in both chambers” could see the Dollar “come under greater pressure, as the Trump administration would have less political backing overall.” Even if “only the House of Representatives changes hands, the Dollar would likely face some headwinds as well, albeit to a lesser extent,” whereas “if the Republicans retain control of both chambers, this should instead provide support for the Dollar.”

Liebke also stresses that “what happens immediately after the midterms is also likely to be relevant for the Dollar.” In particular, he warns that “if Trump were indeed to escalate the conflict with Iran again and launch another attack on the country, this would initially point to further increases in energy prices and rising risk aversion.” In such a risk-off environment, “the Dollar could benefit from its role as a safe haven, as it did at the beginning of the Iran war.”

Technical analysis: Weak momentum keeps further losses on the table

On the daily chart, XAU/USD maintains a bearish outlook as it trades below the 21-day, 100-day and 200-day Simple Moving Averages (SMAs).

The Relative Strength Index (RSI) at 34 hovers just above oversold territory, while the Moving Average Convergence Divergence (MACD) remains below zero with a negative reading, which together hint that downside momentum is still dominant, even if the sell-off is becoming stretched.

On the upside, immediate resistance lies in the $3,950-$4,000 region, followed by the 21-day SMA at $4,092. Above there, the 100-day SMA at $4,210 and a higher horizontal barrier near $4,400 form a broader supply zone, before the 200-day SMA at $4,485 comes into play as a more distant structural ceiling.

On the downside, Gold remains vulnerable to further losses, with immediate support at Friday's yearly low of $3,870. A break below this level could pave the way for further declines.

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