Before the conflict in the Middle East, investors expected the Fed to cut interest rates two or three times in 2026. Now, some even see the possibility of rate hikes. This shift in market expectations is weighing on XAU/USD. Let's discuss this topic and outline a trading plan.
The article covers the following subjects:
Major Takeaways
- Geopolitical risks remain elevated.
- Gold is receiving little support from central banks.
- The market has revised its outlook for the Fed's rate path.
- A rebound from 4,295 and 4,070 is a buying opportunity for XAU/USD.
Weekly Fundamental Forecast for Gold
Donald Trump initially claimed that the conflict in the Middle East would end within six weeks. He later suggested that a deal with Iran was within reach. However, nearly two months have passed since the ceasefire began, yet no meaningful progress has been achieved. As a result, gold, which had rallied on the back of the US president's optimistic rhetoric and expectations of a swift resolution, has been forced to retreat.
Since the outbreak of the conflict in the Middle East, the precious metal has behaved in a rather unusual way. Gold is traditionally viewed as a safe-haven asset and a hedge against inflation. Military action against Iran should have supported XAU/USD through both channels. Instead, prices declined. According to Commerzbank, the explanation lies in a shift in investor sentiment. Before the war, investors expected the Fed to ease monetary policy two or three times in 2026. Now, markets see a roughly 50% chance of a rate hike.
Market Expectations for Fed Rate Changes
Source: Bloomberg
This has strengthened the US dollar and pushed Treasury yields higher, creating a highly unfavorable environment for gold. A similar situation emerged in 2022, but gold rallied sharply at the time thanks to deglobalization and central banks diversifying their foreign exchange reserves. Today, however, central banks' appetite for bullion is fading rapidly.
While central banks purchased more than 1,000 tonnes of gold annually in 2023 and 2024, purchases fell to 750 tonnes in 2025. According to the World Gold Council, March even saw net outflows, while April recorded only a modest inflow of 17 tonnes. Additionally, the Reserve Bank of India sold $12 billion worth of gold reserves to support the struggling rupee. As a result, the safety cushion that had supported gold over the past four years is no longer functioning as effectively.
Investors should not place too much emphasis on the increase in gold's share of central bank reserves from 20% to 27% by the end of 2025, according to ECB research. Gold became the largest reserve asset, surpassing Treasuries at 22% and other US dollar-denominated assets at 20%. The euro accounted for 15%. In reality, this shift was driven primarily by rising gold prices rather than stronger demand for bullion.
Central Bank Reserve Dynamics and Composition
Source: Financial Times
In the short term, gold is likely to face elevated volatility following the release of US labor market data for May. However, its medium-term outlook will depend largely on developments in the Middle East conflict.
Weekly Trading Plan for XAU/USD
The longer the conflict lasts, the further the precious metal may decline. Nevertheless, every war eventually ends with a peace agreement. Therefore, it may make sense to shift from short-term selling to buying XAU/USD on rebounds from support levels at $4,295 and $4,070 per ounce.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of XAUUSD in real time mode
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance broker. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2014/65/EU.
According to copyright law, this article is considered intellectual property, which includes a prohibition on copying and distributing it without consent.
