Gold Price: Oil Surge & Central Banks Cap XAU/USD Gains

Gold prices are holding near $5,000 per ounce as markets brace for a busy week of central bank decisions, with the Federal Reserve’s meeting on Wednesday taking center stage. While geopolitical tensions, particularly surrounding the conflict in the Middle East, continue to support the precious metal, the outlook for interest rate policy is creating a headwind, capping potential gains. At the time of writing, XAU/USD is trading around $4,990, having briefly touched $5,038 earlier in the European session.

Oil Price Surge and Inflationary Pressures

The primary driver of recent volatility remains the escalating conflict in the Middle East and its impact on global energy markets. Disruptions to shipping in the Strait of Hormuz are a major concern, pushing oil prices sharply higher. Brent crude is up roughly 33% since the US-Israel joint strikes on Iran, while West Texas Intermediate (WTI) has risen around 37% from pre-conflict levels. FXStreet reports that the US conducted airstrikes on Iran’s Kharg Island, targeting military sites, and President Donald Trump has warned of potential strikes on Iranian oil infrastructure if shipping through the Strait of Hormuz is interfered with.

Iran’s response, as relayed by its Foreign Minister Abbas Araghchi, suggests the Strait of Hormuz would be closed only to “enemies and those supporting their aggression,” according to Iran’s SNN news agency. The International Energy Agency (IEA) has cautioned that a full recovery of global energy trade will grab time, and preparedness is needed for a prolonged conflict. This sustained increase in energy costs raises the specter of stagflation – a combination of slow economic growth and rising inflation – potentially forcing central banks to reassess their monetary policies.

Shifting Expectations for Federal Reserve Policy

The rising oil price and the potential for sustained inflation are already impacting expectations for Federal Reserve policy. According to the CME FedWatch Tool, the probability of a 25-basis-point (bps) interest rate cut in June has fallen to 23.6% from 51.2% a month ago. Markets are now pricing in only one interest-rate cut by the conclude of the year, a significant shift from earlier expectations of two cuts. This recalibration of expectations is weighing on gold, as higher interest rates typically reduce the attractiveness of non-yielding assets like gold.

Central Bank Convergence: A Week of Key Decisions

The Fed’s decision on Wednesday is not happening in isolation. A host of other major central banks are also scheduled to announce policy decisions this week, including the Bank of England (BoE), the European Central Bank (ECB), the Bank of Japan (BoJ), the Bank of Canada (BoC), and the Reserve Bank of Australia (RBA). The BoE, ECB, BoJ, and BoC are widely expected to hold policy steady, while the RBA is seen as likely to raise interest rates again. This coordinated central bank activity will provide a comprehensive view of the global economic outlook and the prevailing monetary policy stance.

Technical Analysis: Bearish Pressure Builds

From a technical perspective, gold is facing increasing selling pressure. FXStreet’s analysis indicates that prices are testing the key $5,000 psychological level. The near-term bias has turned mildly bearish, with the spot price drifting back toward the rising 50-day Simple Moving Average (SMA) near $4,955. However, the price remains comfortably above the ascending 100-day SMA, which continues to support the broader uptrend. The Relative Strength Index (RSI) has retreated below the 50 midline, signaling fading bullish momentum, and the Moving Average Convergence Divergence (MACD) line is below its Signal line, reinforcing downside pressure.

A decisive break below $5,000 and the 50-day SMA could accelerate selling, potentially exposing the 100-day SMA around $4,573. Conversely, clearing the $5,200 resistance level would be needed to regain upward momentum.

Gold’s Performance in Context

Despite the recent pullback, gold has demonstrated significant strength over the past year. TradingNews reports that gold has posted a 78.1% one-year gain, rising from around $2,880 twelve months ago. The one-month gain stands at 2.5%, and the one-week gain is 0.3%. While the pace of gains has slowed, the overall trend remains firmly upward. This performance significantly outpaces most other major asset classes, highlighting gold’s appeal as a safe-haven asset during times of geopolitical and economic uncertainty.

Implications for Investors and Markets

The current environment presents a complex scenario for investors. The potential for further escalation in the Middle East continues to support gold prices, but the shifting expectations for interest rate cuts are creating a counterweight. The Fed’s forward guidance on Wednesday will be crucial in determining the next direction for gold. A hawkish stance, signaling a reluctance to cut rates, could put further pressure on gold prices. Conversely, a dovish stance, indicating a willingness to ease policy, could provide a boost.

Beyond the Fed, the decisions of other central banks will also be closely watched. A coordinated tightening of monetary policy could exacerbate inflationary pressures and weigh on risk assets, potentially benefiting gold. However, a more dovish approach from multiple central banks could signal concerns about global economic growth and lead to a broader rally in risk assets, potentially reducing demand for gold.

What to Expect in the Coming Days

The coming days will be defined by central bank announcements and further developments in the Middle East. Investors should closely monitor the Fed’s statement and Chair Powell’s press conference for clues about the future path of interest rates. The headlines surrounding the conflict in the Strait of Hormuz will also be critical, as any further escalation could trigger a renewed surge in oil prices and a corresponding increase in demand for gold. Traders may also consider a brief corrective pullback as they cash in on USD longs ahead of the Fed’s decision, creating potential buying opportunities for those looking to add to their gold positions.