Gold slid more than 3.0% on Wednesday, with XAU/USD trading around $4,125 near 11-week lows after US inflation data largely met expectations and left markets leaning towards tighter Federal Reserve policy. Headline CPI rose to 4.2% year on year in May, the highest since April 2023, while core CPI increased to 2.9%; at the same time, monthly core inflation cooled to 0.2% from 0.4%. The inflation uptick followed a jump in energy prices linked to the US-Iran war, and rate-cut pricing earlier in the year has faded as traders increasingly brace for a hike by year-end. CME FedWatch pricing implies a 33% probability of a 25-basis-point move in September, rising to 38% for October and 42% for December.
The stronger policy outlook has kept the USD near recent highs, weighing further on dollar-priced bullion. On the charts, gold has broken below the 200-day SMA at $4,443, with RSI near 27 and ADX (14) above 30, pointing to a firmer downtrend. Support is seen at the March low of $4,098, while resistance sits at $4,443, then the 50-day SMA at $4,608 and the 100-day SMA at $4,782. Central banks added 1,136 tonnes of gold worth around $70 billion in 2022.
Fed Rate Hike Expectations and Impact on Gold
We are seeing gold take a significant hit as the latest inflation numbers solidify the case for a Federal Reserve rate hike later this year. The market is now betting on at least one hike, with the CME FedWatch Tool showing a 42% probability for December, which is a major headwind for a non-yielding asset like gold. This shift in sentiment suggests more downside is likely in the coming weeks.
The recent surge in Brent crude futures, which broke above $115 per barrel last week for the first time since early 2023, is directly feeding into these higher inflation figures. This sustained energy shock is keeping the US Dollar Index (DXY) firm, with it currently trading around the 106.50 level. We believe this strong dollar environment will continue to cap any potential rallies in gold.
Derivative Strategies and Key Levels
For derivative traders, we see an opportunity in buying put options to capitalize on this downward momentum. Considering the speed of the recent drop, purchasing puts with strike prices near or below the $4,100 mark for a July or August expiry could be an effective strategy. This allows us to position for a potential test of the March low at $4,098 while managing our risk.
Alternatively, we are looking at selling out-of-the-money call options or implementing bear call spreads. Given the formidable resistance now formed at the old 200-day moving average around $4,443, selling calls with strike prices above $4,450 can generate income from the expected sideways-to-lower price action. This approach benefits from both price declines and time decay.
We must remain aware that with the Relative Strength Index in oversold territory, a short-term bounce is possible before the next leg down. We would view any rally toward the $4,250-$4,300 area as an opportunity to initiate new bearish positions rather than a change in trend. The primary wildcard remains the US-Iran conflict, as any sudden de-escalation could trigger a sharp reversal.
