Gold held above $4,000 on Friday as the US Dollar softened after the latest US PCE inflation data broadly matched forecasts, tempering expectations of a near-term Federal Reserve rate increase. XAU/USD traded around $4,065 after touching a seven-month low of $3,959 earlier in the week. May headline PCE rose 0.4% MoM, unchanged from April but below the 0.5% forecast, while core PCE was steady at 0.3% in line with expectations. Markets reduced pricing for a September hike, with the implied probability at 61% versus 70% a week earlier, per the CME FedWatch Tool.
Annual inflation remains above the Fed’s 2% target, pointing to borrowing costs staying elevated, even as lower oil prices are expected to ease price pressures. The Dollar was set for a second straight monthly gain; the DXY was near 101.12 after a more than one-year high around 101.80. Geopolitical uncertainty persisted, with Iran reiterating that Strait of Hormuz transit should be co-ordinated with Iranian authorities and criticising the US military presence in the Gulf. Technically, XAU/USD stayed below the 20-period Bollinger SMA at $4,248; RSI was 35 and ADX 41, with resistance near $4,248 and $4,543, and support at $4,000 then $3,953.
Outlook for Gold Amid Inflation and Fed Policy
We see the current stability in gold above $4,000 as a temporary pause in a larger downtrend. While the monthly PCE inflation report offered some relief, the annual core PCE remains stubbornly high at 4.1%, well above the Fed’s target. This reinforces our view that any rallies will likely be short-lived selling opportunities.
Given the strong downtrend signaled by the technicals, we are looking to fade any strength in the coming weeks. We will consider selling call options or establishing bear call spreads with strike prices around the $4,250 resistance level. Historically, during Fed tightening cycles like the one in 2022, gold rallies have consistently failed until there is a clear policy pivot, which we do not see yet.
Key Levels, ETF Flows, and Dollar Strength
We will be watching the $4,000 level as a critical trigger for further downside. A decisive break below this support would prompt us to buy put options, targeting the recent lows near $3,950. The bearish sentiment is confirmed by recent data showing gold-backed ETFs have registered net outflows of over $5 billion this month alone, indicating institutional selling pressure continues.
The strong US Dollar, with the DXY index holding firmly above 101.00, remains a significant headwind for gold. The US economy’s relative strength, evidenced by the recent addition of 250,000 jobs in the last Nonfarm Payrolls report, continues to attract capital and support the greenback. The ongoing US-Iran conflict also adds to dollar-driven safety flows, suppressing gold’s traditional safe-haven appeal.
