Gold (XAU/USD) extends its losses on Friday and remains on course for a second weekly decline as surging Oil prices stemming from the ongoing US-Iran war fuel inflation concerns and trigger a hawkish repricing of global interest-rate expectations, weighing on the non-yielding metal.
At the time of writing, XAU/USD trades around $5,040, fluctuating within the familiar $5,000-$5,200 range.
Middle East war disrupts Oil flows, raising inflation risks
Tensions around the Strait of Hormuz continue to rattle global energy markets as the strategic waterway remains effectively closed by Iran’s Islamic Revolutionary Guard Corps (IRGC) since the start of the US-Israeli war against Iran.
The International Energy Agency (IEA) warned that the Middle East war is creating the largest supply disruption in the history of the global Oil market, while Iran’s new supreme leader, Mojtaba Khamenei, said in his first public statement on Thursday that the closure of the Strait of Hormuz should continue as a “tool to pressure the enemy.”
As the US-Iran war shows no signs of de-escalation and inflation fears continue to mount, Gold finds itself at a crossroads. On one hand, persistent geopolitical tensions provide underlying support and help limit deeper losses. On the other hand, expectations of higher interest rates cap the upside, leaving the metal largely range-bound.
Markets scale back Fed rate-cut bets as USD and yields rise
Before the conflict, markets were pricing in at least two Federal Reserve (Fed) rate cuts this year. Now, traders expect the Fed to hold rates steady, with only around 20 basis points of easing priced in by December, according to Bloomberg interest-rate swaps data. Meanwhile, traders now fully price in a European Central Bank (ECB) rate hike by July and are also raising bets that the Bank of England (BoE) could tighten policy by year-end.
Fading Fed rate-cut bets boost the US Dollar and US Treasury yields, adding further pressure on the precious metal. The US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, climbs above the 100 psychological mark, its highest level since November 2025, while the benchmark US 10-year Treasury yield holds around 4.25% on Friday, hovering near five-week highs.
Meanwhile, markets showed limited reaction to the latest US economic data, as investors remained primarily focused on escalating geopolitical tensions in the Middle East.
The US Core Personal Consumption Expenditures (PCE) Price Index, the Federal Reserve’s (Fed) preferred inflation gauge, rose 0.4% MoM in January, matching both market expectations and the pace recorded in December.
On an annual basis, Core PCE increased 3.0% YoY, coming in below the 3.1% forecast and unchanged from December.
The second estimate of US Gross Domestic Product (GDP) showed the economy expanding at an annualized rate of 0.7% in the fourth quarter, missing the 1.4% forecast and slowing from the previous estimate of 1.4%.
Technical analysis: XAU/USD tests key support near 200-SMA on 4-hour chart
On the 4-hour chart, XAU/USD shows a mildly bearish near-term bias as the price slips below the rising 100-period Simple Moving Average (SMA) near $5,163 while testing the 200-period SMA around $5,083.
A clear break below this area would expose the next downside level near the $5,000 psychological mark. Below there, focus shifts toward $4,850 and $4,650 as deeper support levels if sellers strengthen control.
On the upside, initial resistance stands near the 100-period SMA, while a recovery above the $5,200 level would be needed to restore the prevailing uptrend.
The Relative Strength Index (RSI) hovers near 42, showing fading bullish momentum but not oversold conditions, which aligns with a controlled downside rather than aggressive selling.
The Average Directional Index (ADX) has turned higher toward 20 after a prior decline, indicating trend strength is rebuilding as the pullback develops.
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it.
Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
About The Author
