Gold eyes weekly gain, but hawkish Fed outlook limits upside

Gold (XAU/USD) edged closer to a $4,400 level on Friday, but hawkish expectations from the Federal Reserve (Fed) kept the US Dollar (USD) strong. However, a decline in oil prices helped the metal recover from its multi-month low of $4,235, which was hit on Wednesday. As of writing, XAU/USD was trading around $4,380, up 0.90% for the day.

The Federal Reserve's 25 basis point (bps) interest rate hike to the 3.75%-4.00% range on Wednesday, the first since 2023, pushed the US Dollar and Treasury yields higher, causing Gold prices to drop sharply. The US Dollar Index (DXY) traded near seven-week highs around 100.36. Nonetheless, falling oil prices helped offset the post-Fed negative pressure.

The Fed's signal that additional rate hikes may be on the horizon as they remain committed to bringing inflation back to its 2% target has also contributed to the metal's rebound. Higher borrowing costs raise the opportunity cost of holding non-yielding assets like Gold. Currently, there is a 55% chance of another rate increase at the October meeting, according to the CME FedWatch Tool.

Meanwhile, energy-related inflation risks remain present, with West Texas Intermediate Oil down only around 0.63% near $96.00 despite Saudi Arabia rerouting some exports and repairing its damaged pipeline. US Treasury yields, however, remain elevated at around 4.96%, not far from their 2007 high of 5.04%. For Gold to sustain its recovery, a deeper fall in oil prices, lower Treasury yields, or a shift in Fed rate expectations may be required.

Despite the challenging backdrop, central bank buying, strong investment demand, and steady inflows into Gold-backed exchange-traded funds should support the metal in the long term.