Gold drops to one-week low, seems vulnerable below $4,500 on hawkish central banks

• Gold remains on the back foot as the USD continues to benefit from persistent geopolitical uncertainties.
• Inflation fears lift hawkish central bank expectations and further cap the upside for the non-yielding bullion.
• Traders look to the US PCE Price Index data and the preliminary US GDP on Thursday for a fresh impetus.

Gold (XAU/USD) attracts some sellers for the second consecutive day and drops to a one-week low, around the $4,575 region, during the first half of the European session on Wednesday. Persistent geopolitical uncertainties continue to support the safe-haven US Dollar (USD) and undermine demand for the commodity. Moreover, inflationary concerns have raised expectations for more hawkish central banks, including the US Federal Reserve (Fed), contributing to driving flows away from the yellow metal.

US forces launched self-defense strikes on southern Iran on Monday, targeting Iranian missile sites and boats attempting to place mines. Iran’s Foreign Ministry condemned the US attacks as a violation of a ceasefire that has been in place since early April. Adding to this, the Islamic Revolutionary Guard Corps (IRGC) said that Iran had the legitimate and definite right to retaliate against any US ceasefire violations. Furthermore, Iranian Supreme Leader Mojtaba Khamenei declared that regional countries would no longer act as protective zones for US military bases. This keeps geopolitical risk premium in play and underpins the Greenback’s reserve currency status, weighing on the Gold price.

Meanwhile, the US-Iran standoff, along with the effective closure of the Strait of Hormuz and the US blockade of Iranian ports, might continue to support Crude Oil prices and fuel inflation fears. This, in turn, prompts major central banks to adopt a more hawkish stance, with the Reserve Bank of Australia (RBA) hiked interest rates in May, while the European Central Bank (ECB), the Bank of Japan (BoJ), and the Reserve Bank of New Zealand (RBNZ) are expected to raise interest rates by the end of this year. Adding to this, traders are now pricing in roughly a 50% chance of a rate increase by December. This offers additional support to the USD and contributes to capping the upside for the non-yielding Gold.

Moving ahead, there isn’t any relevant market-moving economic data due for release from the US on Wednesday, leaving the USD at the mercy of comments from influential FOMC members and fresh developments surrounding the Middle East crisis. Traders, however, might refrain from placing aggressive bets and opt to wait for the release of the US Personal Consumption Expenditures (PCE) Price Index, along with the Preliminary (second estimate) US GDP report on Thursday. In the meantime, the aforementioned fundamental backdrop seems tilted firmly in favor of the XAU/USD bears, warranting some caution before positioning for any meaningful intraday recovery in the Gold price.

XAU/USD 4-hour chart

Gold bears seize control as breakdown below $4,500 pivotal support comes into play

From a technical perspective, the precious metal keeps a mildly bearish near-term tone following this week’s failure near the $4,580 horizontal barrier. The said area now coincides with the 100-period Exponential Moving Average (EMA) on the 4-hour chart and should now act as a key pivotal point. A sustained recovery above this hurdle is needed to ease the current bearish structure and open the way for a more durable rebound.

Meanwhile, the Relative Strength Index (RSI) stays below the neutral band, near 41, and the Moving Average Convergence Divergence (MACD) sits in negative territory. Momentum indicators, in turn, suggest persistent downside pressure despite a lack of fresh momentum extremes. Nevertheless, a clean break below the monthly swing low, around the $4,450 area, would likely invite an extension of the current corrective phase.

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