Gold price retraces as Fed hawks keep the US Dollar bid

Gold prices fell on Monday, sliding over 0.6% following the Federal Reserve's recent interest rate increase. The US Dollar Index, representing the performance of the US currency against other currencies, has shown some signs of recovery on Monday despite a decline in Treasury yields. At the start of the week, the yellow metal faced pressure, with XAU/USD trading at $4,350 after peaking near $4,383.

Despite initial concerns, the Fed's decision has gained credibility due to the closer relationship between Fed Chair Kevin Warsh and US President Donald Trump. The US Dollar Index is up 0.2% at 100.42, supported by expectations of further tightening by the US central bank. Additionally, hopes for diplomatic progress between the US and Iran have led to a drop in oil prices after President Trump indicated willingness to meet with his Iranian counterpart, who is expected to attend the UN General Assembly this week.

Despite this, US Treasury yields remain low, but bullion has struggled to rally due to its inverse relationship with US yields. Market participants remain confident that the Fed will raise rates by the end of the year, with traders anticipating at least a 33 basis point increase. St. Louis Fed President Alberto Musalem suggested that without further policy restraint, inflation may remain significantly above the 2% target in 18 months.

Fed officials, including Austan Goolsbee and Neel Kashkari, have expressed concerns about supply shocks and the need for economic hardship to bring inflation back to the 2% goal. The Minneapolis Fed President remains worried about inflation across various sectors of the US economy. Technical analysis indicates that Gold is likely to consolidate slightly but with a bearish bias, currently trading around $4,322.

Support can be found near the day's low, while further declines could expose the 100-day Simple Moving Average at $4,319 and the 50-day at $4,295. If these levels are breached, the next support is the $4,000 milestone. Conversely, if Gold gains traction and trades above $4,400 for a day, it could open the door for trading within the $4,400-$4,500 range.

Should prices continue to rise, the next significant level to watch is the 200-day SMA at $4,541. Gold has long been regarded as a store of value, a hedge against inflation, and a safe haven during times of uncertainty. It holds significant importance in central banks' foreign exchange reserves as they seek to support their currencies during turbulent times.

In 2022, central banks added 1,136 tonnes of gold, representing a record purchase and underscoring the metal's enduring appeal.