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• Gold gains some positive traction, though the fundamental backdrop warrants caution for bulls.
• Inflation fears continue to fuel bets for more hawkish central banks and undermine the bullion.
• US-Iran tensions benefit the USD’s reserve currency status and further weigh on the commodity.

Gold (XAU/USD) clings to modest recovery gains heading into the European session on Monday and holds comfortably above the $4,500 mark, or an over one-month low, touched the previous day. The uptick lacks any obvious fundamental catalyst and runs the risk of fizzling out quickly, warranting some caution before positioning for any meaningful upside. Heightened US-Iran tensions continue to fuel inflationary concerns and keep expectations of higher interest rates alive. This, along with a firmer US Dollar (USD), might contribute to capping the non-yielding bullion.

The fragile ceasefire between the US and Iran is on the brink of collapse after a severe flare-up of violence in the Persian Gulf on Monday. The United Arab Emirates (UAE) and South Korea reported strikes on ships in the vital channel. The UAE also said a fire broke out at the oil port of Fujairah following Iranian missile and drone attacks. US President Donald Trump warned that Iran would be blown off the face of the earth if it attacks American vessels escorting ships through the strategic waterway under a new initiative called “Project Freedom”.

The latest developments raise the risk of a further escalation of tensions in the Middle East and have triggered a fresh leg up in Crude Oil prices on Monday. This reaffirms market expectations that the war-driven surge in energy prices will revive inflationary pressure and prompt major central banks, including the US Federal Reserve (Fed), to adopt a more hawkish stance. According to the CME Group’s FedWatch Tool, the probability of a Fed rate hike by the end of this year currently stands at roughly around 35% compared to less than 10% last Friday.

The outlook, in turn, remains supportive of elevated US Treasury bond yields and acts as a tailwind for the USD. Furthermore, the US-Iran standoff over the Strait of Hormuz turns out to be another factor that benefits the Greenback’s reserve currency status and validates the near-term negative outlook for the commodity, suggesting that any subsequent move up is more likely to get sold into. Hence, it will be prudent to wait for strong follow-through buying before confirming that the Gold has bottomed out and positioning for further gains.

XAU/USD 4-hour chart

Gold bulls seem hesitant; $4,500 pivotal support holds the key

From a technical perspective, the XAU/USD pair retains a bearish near-term bias as it holds beneath the 200-period Simple Moving Average (SMA) at $4,655.02. The precious metal is also capped by the 38.2% Fibonacci retracement of the March-April upswing, leaving price confined under a dense resistance band despite a modest bounce from the $4,500 mark, or the 50% retracement level.

Meanwhile, momentum indicators remain soft, with the Relative Strength Index (RSI) hovering below the 50 line at 39.84 and the Moving Average Convergence Divergence (MACD) indicator in negative territory. This, in turn, hints that the attempted recovery could continue to fade under overhead supply at the 38.2% Fibo. at $4,595.23. A subsequent move up might confront hurdles near the 200-period SMA at $4,655.02 and then the 23.6% retracement at $4,711.12.

On the downside, initial support emerges at the 50% level near $4,501.57, ahead of the 61.8% retracement at $4,407.90, with deeper cushions at $4,274.55 and $4,104.68 if bearish pressure accelerates.

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