Gold (XAU/USD) dropped to a two-month low during the Asian session on Tuesday, as sustained strength in the US Dollar continued to undermine demand for the precious metal [1]. Despite a moderation in October Federal Reserve (Fed) rate hike expectations, the USD maintained its bullish tone, pressuring gold prices further. Bears are now watching for a break below the $4,100 mark, which could signal additional losses for gold [1].
Recent US macroeconomic data indicated moderating inflation and a slight cooling in the labor market, with crude oil prices also near a four-week low due to resilient Middle Eastern exports and a G7 emergency stockpile release. These factors have eased pressure on the Fed to raise interest rates. However, traders are still pricing in over an 85% chance that the Fed will increase borrowing costs again by the end of the year [1]. Deutsche Bank economists noted that while the headline payrolls print was softer, the broader labor market remains resilient, and they expect two further 25 basis point Fed hikes in the coming quarters. Market pricing reflects expectations for another 86 basis points of tightening over the next 12 months, down from 100 basis points early last week but up from 70 basis points just after the payroll release [1].
Geopolitical uncertainties also contributed to gold's decline. The Iran-backed Houthi group in Yemen claimed responsibility for three military operations targeting airports, an oil facility, and military sites in Saudi Arabia. In response, the Saudi-led coalition reported destroying a ballistic missile launch platform and a storage facility in Yemen. Additionally, media reports indicated that Israel is preparing a potential attack against Iran, either with US coordination or independently, heightening concerns of further escalation in the Middle East [1].
A deepening fiscal shock in France led to an extended rout in the fixed income market, keeping US bond yields near multi-year highs and providing further support to the US Dollar. This combination of strong USD, high bond yields, and persistent geopolitical risks suggests that the path of least resistance for gold remains to the downside [1].
CONCLUSION
Gold's decline to a two-month low reflects the combined impact of a strong US Dollar, resilient US economic data, and ongoing geopolitical tensions. With market expectations still tilted toward further Fed tightening and elevated US bond yields, gold may face continued downward pressure in the near term.