Gold (XAU/USD) deepens its losses on Friday and remains on course for a second weekly decline as rising oil prices stemming from the ongoing U.S.-Iran war fuel inflation fears and cause a hawkish re-evaluation of global interest rate expectations, weighing on the underperforming metal.
At the time of writing, the XAU/USD rate is around $5,040, hovering in the familiar $5,000-$5,200 range.
The war in the Middle East is disrupting the flow of oil, increasing the risk of inflation
Tensions around the Strait of Hormuz continue to rattle global energy markets as the strategic waterway remains effectively closed by Iran’s Islamic Revolutionary Guard Corps (IRGC) since the start of the US-Israeli war against Iran.
The International Energy Agency (IEA) has warned that the war in the Middle East is causing the largest supply disruption in the history of the global oil market, while Iran’s recent supreme leader, Mojtaba Khamenei, said in his first public statement on Thursday that closing the Strait of Hormuz should continue to be a “tool to put pressure on the enemy”.
As the US-Iran war shows no signs of de-escalation and inflation concerns continue to mount, gold is at a crossroads. On the one hand, persistent geopolitical tensions provide crucial support and aid limit deeper losses. On the other hand, expectations for higher interest rates are limiting growth, leaving the metal largely scope-limited.
Markets are retreating from Fed plans to cut interest rates as USD and yields rise
Before the conflict, markets were pricing in at least two Federal Reserve (Fed) interest rate cuts this year. Currently, investors expect the Fed to keep interest rates steady, with only about a 20 basis point cut in interest rates through December, according to Bloomberg data on interest rate swaps. Meanwhile, investors are fully pricing in a European Central Bank (ECB) interest rate enhance by July and also betting that the Bank of England (BoE) may tighten policy by the end of the year.
The Fed’s expiring bets on interest rate cuts are pushing up U.S. dollar and U.S. Treasury yields, increasing pressure on the precious metal. The US dollar index (DXY), which tracks the value of the dollar against a basket of six major currencies, is above the psychological mark of 100, the highest level since November 2025, while the benchmark 10-year US Treasury yield remained around 4.25% on Friday, hovering near five-week highs.
Meanwhile, markets showed circumscribed reaction to the latest US economic data as investors continued to focus primarily on the escalating geopolitical tensions in the Middle East.
The US Personal Consumption Expenditures (PCE) Price Index, the Federal Reserve’s (Fed) preferred inflation gauge, rose 0.4% m/m in January, meeting both market expectations and the pace seen in December.
On an annual basis, Core PCE increased by 3.0% y/y, below the 3.1% forecast and unchanged from December.
The second estimate of U.S. gross domestic product (GDP) showed that the economy expanded at an annualized rate of 0.7% in the fourth quarter, missing the forecast of 1.4% and slowing from the previous estimate of 1.4%.
Technical Analysis: XAU/USD Tests Key Support Near 200-SMA on 4-Hour Chart
On the 4-hour chart, the XAU/USD pair is showing a slightly bearish deviation in the brief term as the price falls below the rising 100-period straightforward moving average (SMA) near $5,163, while testing the 200-period SMA near $5,083.
A clear break below this area would expose another bearish level near the psychological $5,000 mark. Below, attention shifts towards $4,850 and $4,650 as deeper support levels if sellers tighten control.
On the other hand, initial resistance is located near the 100-period SMA, while a rebound above the $5,200 level would be needed to restore the dominant uptrend.
The relative strength index (RSI) is hovering near 42, showing waning upward momentum but not oversold conditions, indicating a managed decline rather than aggressive selling.
The Average Directional Index (ADX) has risen towards 20 after previously dwindling, indicating that trend strength is regaining as the pullback develops.
Frequently asked questions about inflation
Inflation measures the enhance in prices of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a monthly (m/m) and annual (y/y) basis. Core inflation excludes more volatile items such as food and fuel, which can fluctuate due to geopolitical and seasonal factors. Core inflation is the figure economists focus on, and it is the level aimed at by central banks, which are required to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (m/m) and year-on-year (y/y) basis. Core CPI is the figure that central banks target because it does not include variable spending on food and fuel. When core CPI rises above 2%, it typically results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
While it may seem counterintuitive, high inflation in a country causes the value of its currency to enhance, and vice versa for lower inflation. This is because the central bank usually raises interest rates to combat higher inflation, which attracts more capital inflows from around the world from investors looking for a lucrative place to put their money.
Historically, gold was the asset that investors turned to in times of high inflation because it held its value, and while investors will often continue to buy gold for its sheltered haven property in times of extreme market turmoil, in most cases this is not the case. This is because when inflation is high, central banks raise interest rates to combat it. Higher interest rates are bad for gold because they enhance the opportunity cost of holding gold compared to interest-bearing assets or putting your money in a deposit account. On the other hand, lower inflation is usually good for gold because it lowers interest rates, making the brilliant metal a more viable investment alternative.
