Gold (XAU/USD) struggled to build on a modest gap-up above $4,100 in early European trade on Monday, with markets cautious ahead of the Federal Open Market Committee meeting on Wednesday. A pause in US strikes on Iran after 13 consecutive nights, and reports that Tehran would halt attacks if the US does the same, pushed crude oil lower and eased inflation concerns. As a result, rate-hike expectations were pared back, US Treasury yields dipped, and the US Dollar (USD) pulled away from last week’s retest of a monthly high, offering limited support to the non-yielding metal.
Scepticism remained over the durability of the ceasefire theme, while shipping through Bab el-Mandeb fell on July 26 after Iran-backed Houthis in Yemen attacked Saudi oil installations on the Red Sea coast. Concerns about potential disruption tied to restricted transit through the Strait of Hormuz helped underpin crude, in turn limiting USD downside and capping gold’s upside. Technically, price action since June 19 resembles a rectangle, following a break below the 200-day Simple Moving Average (SMA), keeping the broader downtrend intact; the Relative Strength Index sits just under 50 and the Moving Average Convergence Divergence (MACD) is positive. Resistance is seen near $4,200, with a daily close above it needed to target the 200-day SMA at $4,493.65.
Strategic Approach Ahead of the FOMC Meeting
As we navigate the temporary pause in US-Iran hostilities, we advise derivative traders to remain cautious ahead of this Wednesday’s crucial FOMC meeting. With gold consolidating just above the $4,100 level, the market is bracing for a potential shift in Federal Reserve policy. We recommend focusing on short-term, range-bound strategies rather than chasing breakouts until the Fed gives clear direction.
While hopes for diplomacy have temporarily cooled crude prices, shipping traffic through the Bab el-Mandeb strait fell sharply yesterday following new Houthi attacks. Historically, Red Sea shipping disruptions have slashed transit volumes by over 40%, which quickly drives energy costs and inflation expectations back up. Because of this lingering geopolitical risk, we believe oil prices will find a strong floor, limiting any major downward movement in gold.
Volatility Trading and Technical Outlook
To trade this week’s interest rate decision, we suggest utilizing option strangles to capitalize on the expected volatility. Implied volatility for gold options typically spikes ahead of key central bank events, making pre-meeting positioning highly sensitive to sudden rate projections. If the Fed signals a formal pause in rate hikes, we could see a rapid move toward the upper boundary of gold’s current trading range.
From a technical perspective, gold remains locked in a daily rectangle pattern with critical resistance near $4,200. For futures traders, we recommend waiting for a confirmed daily close above $4,200 before establishing long positions targeting the 200-day moving average at $4,493.65. Until that breakout occurs, we should treat recent price increases as short-term corrections within a broader downtrend.
