Gold lacks upside momentum as Fed hike bets grow amid US-Iran tensions
LONDON (April 5) Gold (XAU/USD) steadies on Tuesday but lacks upside momentum as higher-for-longer interest rate expectations rise following renewed escalation in the Middle East, which continues to fuel energy-driven inflation concerns. At the time of writing, XAU/USD is trading around $4,550 after hitting a five-week low near $4,500 on Monday.
Reports of fresh attacks in the Gulf region on Monday have pushed the fragile truce between the United States (US) and Iran to the brink, as both sides intensify efforts to assert control over the Strait of Hormuz. Iran reportedly targeted Oil infrastructure in the United Arab Emirates (UAE), while US President Donald Trump said US forces shot down seven small Iranian boats near the Strait.
Trump warned that Iran would be “blown off the face of the Earth” if it attacks American ships, as the US military moves ahead with his “Project Freedom” plan aimed at guiding stranded vessels out of the waterway.
Iran’s Foreign Minister Abbas Araghchi said that developments in the Strait of Hormuz “make clear there’s no military solution to a political crisis,” while adding that “talks are making progress” with Pakistan acting as a mediator.
As tensions around the Strait of Hormuz intensify and direct negotiations remain limited, the conflict shows little sign of easing in the near term. Renewed attacks have heightened fears of global inflation, as supply disruptions keep a geopolitical risk premium firmly embedded in energy markets.
Against this backdrop, central banks, particularly the Federal Reserve (Fed), are expected to maintain a hawkish stance to contain inflation, which remains above the Fed’s 2% target. While Gold is traditionally seen as an inflation hedge, higher interest rates reduce its appeal by making yield-bearing assets more attractive.
Traders now expect the Fed to delay rate cuts, while pricing in a higher likelihood of interest rate hikes, with the CME FedWatch Tool showing the probability of a rate hike at the December meeting rising to around 27% from near zero a week ago.
In the near term, Gold is expected to trade with a downside bias as elevated US Treasury yields and a firm US Dollar (USD) continue to weigh on the non-yielding metal.
Looking ahead, traders will closely track developments in the US-Iran conflict, while also focusing on upcoming US economic data, including the Nonfarm Payrolls (NFP) report due on Friday, which could influence interest rate expectations.
FXStreet
