Gold drifts lower as oil-driven inflation risks and US-Iran tensions bolster USD

Gold (XAU/USD) attracts some sellers following a modest Asian session uptick on Tuesday, stalling a two-day move higher from the $4,300 neighborhood. The US Dollar (USD) builds on the overnight bounce from a two-month trough as inflation risks stemming from higher crude oil prices underpin prospects for at least one interest rate hike by the US Federal Reserve (Fed) in 2026. Adding to this, the US-Iran standoff keeps the geopolitical risk premium in play and further underpins the safe-haven Greenback, which, in turn, is seen exerting pressure on the precious metal.

In the latest developments surrounding the Middle East crisis, US President Donald Trump said that Iran should surrender to end a nearly six-month-long war. Trump added that the US is not seeking an extension of the Memorandum of Understanding (MoU) with Iran, which expired on Monday. Furthermore, Trump repeated his idea of declaring the critical Strait of Hormuz as a US territory and warned that he would target Oman if it hindered actions to reopen the strategic waterway. This comes as the Iran-backed Houthi rebels in Yemen escalated their campaign against Saudi Arabia.

Houthi military spokesperson Yahya Saree said the group used several ballistic missiles to target a Saudi military landing ship and four accompanying patrol boats off the coast of Mokha. This could further disrupt commercial shipping traffic through the Bab al-Mandeb Strait – one of the world's most important trade routes – and fuel energy supply concerns, lifting crude oil prices to a two-week high. Investors remain worried that higher energy prices would rekindle inflationary pressures, which, along with hawkish Fed expectations, remain supportive of elevated US Treasury bond yields.

According to TD Securities, the Fed is likely to "remain on hold over our forecast horizon," with the policy stance anchored by the view that "inflation should remain high for the rest of the year" and that "the labor market has stabilized, allowing the FOMC to shift focus to its inflation mandate." The bank adds that, "if the Fed were to move this year, we believe that move is more likely to be a hike than a cut," noting that under "a new management that espouses a blurrier reaction function, data dependence will likely gain prominence for determining the path ahead for monetary policy."

This offsets last week's soft US inflation and Retail Sales data, which forced investors to scale back their bets for an imminent Fed rate hike. According to CME Group's FedWatch Tool, traders are assigning around a 64% chance that the US central bank will keep rates unchanged at the September 2026 meeting. Investors, however, are still pricing in a greater possibility that the Fed will raise borrowing costs at least once by the end of this year. The outlook helps revive demand for the Greenback and prompts some intraday selling around the non-yielding Gold, though the downside seems limited.

Traders might refrain from placing aggressive directional bets and opt to wait for more cues about the Fed's future policy path. Hence, the focus will remain glued to the release of FOMC Minutes on Wednesday, which will play a key role in influencing the near-term USD price dynamics and provide some meaningful impetus to the precious metal. In the meantime, the mixed fundamental backdrop warrants some caution before positioning for any further depreciation.

XAU/USD daily chart

Technical Analysis

From a technical perspective, the precious metal continues its struggle to find acceptance above the 50% retracement level of the April-June decline. Momentum indicators, however, stay constructive. In fact, the Relative Strength Index (RSI) at 63.47 holds in bullish territory, while the Moving Average Convergence Divergence (MACD) indicator remains positive, hinting that selling pressure is corrective rather than impulsive. However, it will still be prudent to wait for a move beyond last week's swing high, around $4,450, before positioning for further gains toward the 200-day Simple Moving Average (SMA) at $4,508.

On the downside, first support is seen at the 38.2% retracement at $4,302.33, with further demand expected at the 23.6% level at $4,164.44 and then around the structural floor anchored near $3,941.54, where buyers would likely attempt to arrest a deeper correction.