Gold starts week on the back foot as US Dollar holds firm, Oil decline limits losses

Gold (XAU/USD) kicked off the week on a negative note, ending a two-day winning streak, as anticipation of more Federal Reserve rate hikes and a stronger US Dollar (USD) curbed its upside. At the time of writing, XAU/USD traded around $4,350, slipping nearly 0.60% for the day. However, the metal's lack of strong selling pressure is mitigated by falling oil prices, which keep US Treasury yields below last week's multi-year peaks.

West Texas Intermediate (WTI) oil prices hover around $93.50, its lowest level in over a week and continue to drop for a fourth consecutive day. This downward trend is fueled by diplomatic efforts surrounding the war in the Middle East and enhanced energy flows from Saudi Arabia. President Donald Trump has expressed openness to meeting Iranian President Masoud Pezeshkian and other Persian Gulf leaders during the United Nations General Assembly.

Iran's security chief, Mohsen Rezaei, stated that Tehran has conveyed its conditions to the US through international mediators, but also warned of a strong response if the US initiates another attack. Meanwhile, Iran-backed Houthis and Saudi forces are still locked in conflict.

For Gold, the key drivers remain US interest-rate expectations, the US Dollar, bond yields, crude oil prices, and geopolitical developments. Energy prices are still considerably higher than pre-war levels, contributing to inflationary pressures. This energy shock has prompted major central banks to adopt tighter monetary policies, with the Fed raising interest rates by 25 basis points last week.

Higher borrowing costs usually harm non-yielding assets like Gold, as interest-bearing investments become more enticing. Traders are anticipating further Fed rate hikes and have already factored in a significant chance of another increase in October. The updated dot plot suggests at least one more rate hike this year. The possibility of tighter policy supports the US Dollar and maintains Treasury yields elevated, creating a challenging environment for Gold.

The US Dollar Index (DXY), which gauges the Greenback against a basket of six major currencies, is currently sitting at 100.30, below the seven-week high of 100.56 reached on Friday. Looking ahead, the US economic calendar is relatively light this week, with preliminary S&P Global Purchasing Managers Index (PMI) data and the University of Michigan (UoM) Consumer Sentiment survey for September as the main releases.

Markets will also be watching a packed schedule of Fed speakers for new clues about the future policy trajectory. On the four-hour chart, XAU/USD hovers just above the 20-period Bollinger Simple Moving Average around $4,347, leaving the near-term bias neutral as price fluctuates between nearby band support and overhead resistance.

The upper Bollinger band at $4,412 caps the topside for now, indicating that upside attempts are constrained while momentum normalizes. The Relative Strength Index is near 51, and the Moving Average Convergence Divergence (MACD) is flat around the zero line, hinting at a potential loss of directional conviction. On the downside, initial support can be found at the mid-Bollinger band around $4,347, followed by the lower band near $4,282 and a more robust floor at $4,200.

To the upside, immediate resistance is seen at the upper Bollinger band around $4,412, followed by a horizontal barrier at $4,450 and then $4,500. A break above these levels could signal a stronger bullish continuation on the four-hour timeframe. Gold has historically been a popular choice for storing value and medium of exchange, and is now widely recognized as a safe-haven asset during turbulent times.

As a yield-less asset, Gold tends to rise with lower interest rates, while higher borrowing costs typically weigh it down. Central banks are the largest Gold holders, often diversifying their reserves during turbulent periods to bolster currency strength and perceived economic stability. In 2022, central banks added 1,136 tonnes of Gold, worth around $70 billion, marking the highest yearly purchase since records began.

This trend is particularly notable among emerging economies such as China, India, and Turkey. Gold exhibits an inverse relationship with the US Dollar and US Treasuries, both major safe-haven assets. A depreciation in the Dollar often leads to an increase in Gold prices, providing investors and central banks with an opportunity to diversify their assets during uncertain times.

Gold also demonstrates an inverse correlation with risk assets; a stock market rally typically weakens Gold prices, while sell-offs in riskier markets generally favor the precious metal. The price of Gold can be influenced by a diverse range of factors, including geopolitical instability or concerns about a deep recession, which can quickly escalate the Gold price due to its status as a safe-haven asset.

As a yield-less asset, Gold benefits from lower interest rates, while a higher cost of money usually undermines its value. However, most movements depend on the behavior of the US Dollar, as Gold is priced in dollars (XAU/USD).