Gold gains as US Dollar and yields pause, but weekly loss remains in sight

Gold prices rose on Friday amid a pause in the US Dollar and Treasury yields after their strong week-long rally. At press time, XAU/USD was trading near $4,310, having dropped to a one-week low of $4,244 on Thursday. Despite a bearish fundamental and technical outlook, the precious metal is still on track for a weekly decline. The Federal Reserve's potential rate hikes, with 16 of 18 policymakers expecting at least one more increase this year, pose a significant challenge to Gold's price.

This week, optimism grew for another rate hike as early as next month following robust US Purchasing Managers' Index (PMI) data and cautious remarks from Fed officials. New York Fed President John Williams stated, "We need to get inflation back to target in a timely manner," hinting at a possible further rate hike by the end of the year.

Richmond Fed President Tom Barkin added that inflation concerns are spreading beyond energy and tariff-related shocks. The CME FedWatch Tool now projects a 71% chance of a rate hike at the October meeting. The US Dollar Index (DXY), which measures the dollar's value against six major currencies, rose to 101, its highest level in almost two months, while the 10-year Treasury yield hovered around 5.17%, near its peak since 2007.

The recent oil price surge due to the Middle East conflict adds to inflation pressures, complicating the Fed's goal to bring inflation down to 2%. Iran's proposal to reopen the Strait of Hormuz if the US eases military pressure and lifts its blockade, along with ongoing negotiations for a phased deal, has not yet yielded results.

Upcoming data releases, including the final University of Michigan Consumer Sentiment Index for September and the ISM Manufacturing PMI and Nonfarm Payrolls report next week, could significantly impact the Fed's October meeting expectations. On the 4-hour chart, XAU/USD shows a bullish near-term trend, staying above the 20-period Simple Moving Average ($4,299) and supported by the lower band near $4,237.

Immediate resistance is at $4,330, followed by the Bollinger upper band near $4,362. A break above this level could expose the next resistance zone between $4,450 and $4,500. Conversely, support is provided by the Bollinger middle band at $4,299 and the lower band near $4,237. A deeper drop could expose the $4,150-$4,200 support zone.

Historically, Gold has been a store of value and medium of exchange, serving as a safe-haven asset during turbulent times, hedging against inflation and currency depreciation. Central banks are the largest Gold holders, often diversifying their reserves to bolster their currencies during crises. In 2022, central banks added 1,136 tonnes of Gold, the highest yearly purchase since records began.