Gold bounces off eight-week low; not out of the woods amid rising Fed hike bets

Gold (XAU/USD) attracts some buyers during the Asian session on Tuesday, reversing a part of the previous day's heavy losses to the $4,100 neighborhood, or its lowest level since August 4. The bearish fundamental backdrop, however, warrants some caution before positioning for any meaningful appreciating move for the precious metal. The US Federal Reserve's (Fed) hawkish outlook, elevated US bond yields, and geopolitical uncertainties keep the US Dollar (USD) pinned near a two-month high, which, in turn, acts as a headwind for the commodity.

The US central bank delivered the widely expected 25 basis point (bps) rate hike—its first in over three years—earlier this month and signaled a firm commitment to suppressing sticky inflation. Adding to this, a slew of influential FOMC members stated that another interest rate increase may be appropriate before the end of 2026. According to CME Group's FedWatch Tool, traders are pricing in a 70% chance that the Fed would raise borrowing costs again in October amid inflation risks stemming from higher energy prices due to the Middle East conflict.

Cook flags persistent inflation risks from AI and geopolitics, keeps Fed bias hawkish

Fed’s Cook delivers a slightly more hawkish-than-usual tone, with the FXS Speechtracker score at 7/10, marginally above the established baseline of 6.9/10. Cook highlights continued inflation pressure in coming months from artificial intelligence and Middle East conflict, stressing that any future rate adjustments will depend on incoming inflation and labor data, even as the labor market is described as well positioned to absorb higher rates. While Cook acknowledges that AI-driven productivity should bring modest disinflation over the next few years, the warning that these gains will not arrive in time to offset broadening inflation this year reinforces a near-term hawkish bias and keeps DOLLAR-supportive risks in focus.

The FXS Fed Sentiment Index slipped by 0.63 points to 146.89, indicating a modest pullback in perceived hawkishness despite the speech’s above-baseline score on the FXS Speechtracker. With the FXS Fed Sentiment Index still well above the neutral 100 mark, the Fed remains firmly in hawkish territory, suggesting that any future rate hikes or a prolonged higher-for-longer stance continue to underpin DOLLAR strength even as market expectations cool slightly at the margin.

In the latest development, US President Donald Trump rejected a peace proposal from Iran to resolve their military conflict and reopen the Strait of Hormuz immediately on meeting their terms. Furthermore, Trump denied a report by the news outlet Axios that he offered Iran sanctions relief and the release of frozen funds in return for concrete Iranian steps regarding the nuclear program. This keeps the geopolitical risk premium in play and continues to support crude oil prices, fueling inflationary concerns and pushing US bond yields to multi-year highs.

In fact, the yield on the 30-year US government bond shot to its highest level since mid-May 2004, while the benchmark 10-year Treasury yield touched its highest since mid-June 2007 and the rate-sensitive 2-year yield rose to the highest since May 2024. This, in turn, favors USD bulls and makes it prudent to wait for strong follow-through buying before confirming that the Gold price has bottomed out. Traders might also opt to wait for this week's important US macro releases before placing aggressive directional bets on the XAU/USD pair.

The US Personal Consumption Expenditures (PCE) Price Index – the Fed's preferred inflation gauge – is due on Wednesday, along with the final Q2 GDP print. This will be followed by the US ISM Manufacturing PMI on Thursday, though the focus will remain glued to the closely watched US Nonfarm Payrolls (NFP) report on Friday. Apart from this, speeches from influential FOMC members would be scrutinized for more cues about the Fed's future policy path, which, in turn, will drive USD demand and provide some meaningful impetus to the Gold price.

XAU/USD daily chart

Technical Analysis

The XAU/USD pair maintains a bearish near-term tone following the recent breakdown below the 200-day Exponential Moving Average (EMA) at $4,310 and the mid-range Fibonacci retracement levels. The metal has slipped back under the 61.8% retracement at $4,227, keeping it confined within the lower half of the recent range. Meanwhile, the Moving Average Convergence Divergence (MACD) shows a negative reading at 26.21, and the Relative Strength Index (RSI) at 36.40 hovers just above oversold territory, hinting at persistent downside pressure but with scope for intermittent corrective bounces.

Any further recovery, however, might face initial resistance at the 61.8% Fibo. retracement at $4,227, ahead of a dense barrier formed by the 200-day EMA at $4,310 and the 50% retracement at $4,316. Further hurdles emerge at $4,406 and $4,517 before the recent cycle high near $4,696. On the downside, immediate support appears at the 78.6% retracement at $4,099, with a deeper floor at the prior swing low around $3,937. A decisive break below the latter would reinforce the prevailing bearish bias, while sustained trading above $4,2278 would be needed to start easing the downside pressure.