Gold struggles to extend recovery from two-month low as hawkish Fed, strong USD cap gains

• Gold attracts some buyers on Thursday, though it lacks follow-through as a bullish US Dollar caps gains
• The hawkish Fed, elevated US bond yields, and geopolitical uncertainties act as a tailwind for the USD.
• The bearish setup warrants some caution before positioning for further XAU/USD appreciation.

Gold (XAU/USD) sticks to modest intraday gains through the first half of the European session, albeit it lacks bullish conviction and remains below $4,150. The US Dollar (USD) retains its bullish undertone amid a combination of factors, keeping a lid on the previous metal's bounce from a two-month low, which it touched the previous day.

Minutes of the September 15–16 Federal Open Market Committee (FOMC) meeting, published on Wednesday, showed that members voted unanimously to raise the federal funds rate target range and leaned toward further tightening. Most participants viewed that another rate hike would likely be appropriate by the end of this year to combat persistent inflation. The hawkish tone, however, did little to alter expectations that the Federal Reserve (Fed) will pause at its next meeting in October, offering some support to the non-yielding Gold.

Meanwhile, the CME Group's FedWatch Tool indicates that traders are still pricing in around an 80% chance that the US central bank will raise borrowing costs in December. Adding to this, worries that inflation may prove more stubborn than expected amid volatile energy prices keep US bond yields elevated near multi-year highs. This, along with persistent geopolitical uncertainties stemming from the ongoing conflicts in the Middle East, might continue to support the safe-haven Greenback and cap any meaningful appreciation for gold.

In the latest developments, the Pentagon reportedly instructed US Central Command (CENTCOM) several days ago to conclude preparations for resuming major combat operations in Iran as US President Donald Trump weighs a specific date for launching strikes. The US and Israeli sources said that it could happen before the US midterm elections and possibly the Israeli elections a week earlier, raising the risk of a further escalation of tensions in the region. This, in turn, backs the case for the emergence of some USD dip-buyers at lower levels.

Hence, strong follow-through buying is needed to confirm that the Gold price has bottomed out in the near term and position for any further upside. Traders now look to the release of the usual Weekly Initial Jobless Claims data from the US, which, along with speeches from influential FOMC members, will drive the USD. Apart from this, the incoming geopolitical headlines might continue to infuse volatility across the global financial markets and produce short-term opportunities around the XAU/USD pair amid the bearish fundamental backdrop.

XAU/USD daily chart

Technical Analysis

The XAU/USD pair has been showing some resilience below the 78.6% Fibonacci retracement level of the June-August upswing, though it keeps a bearish near-term bias beneath technically significant daily Simple Moving Averages (SMA). Moreover, momentum indicators remain fragile. In fact, the Relative Strength Index (RSI) is hovering near 40 and the Moving Average Convergence Divergence (MACD) is still negative, hinting that selling pressure prevails despite the absence of extreme oversold conditions.

Hence, any subsequent move up is likely to confront an immediate hurdle near the 61.8% Fibo. retracement at $4,233. This is followed by the 50% retracement at $4,320 and the 50-day SMA at $4,332, which collectively reinforce a broader supply zone. Above there, further barriers are located at the 38.2% retracement at $4,408 and the 23.6% level at $4,516. On the downside, immediate support is seen at the 78.6% Fibo. level at $4,108, ahead of the prior cycle low near $3,949.

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