Gold drops below $4,000 ahead of Fed as surging Oil intensifies weekly sell-off

• Gold slides under $4,000 as losses for the week approach 3.90%.
• WTI breaks above $100 amid escalating hostilities in the Middle East.
• Markets price in a 78% chance of a December Fed hike before FOMC and PCE releases.

Selling pressure continues to weigh on Gold (XAU/USD), which is down nearly 0.60% on Friday and heading for a weekly loss. Rising energy costs have increased the likelihood of major central banks tightening monetary policy to contain inflation. Having touched a three-month low of $3,975, XAU/US is hovering near $4,000 at the time of writing.

Can XAU/USD find support after a nearly 4% weekly fall as energy costs fuel global inflation risks?

Sentiment across financial markets has soured as the Middle East conflict intensifies, leaving bullion on course for a weekly decline of almost 3.90%. According to newswire reports, the US and Israel are preparing to attack Iran after the US midterm elections, while the Islamic Revolutionary Guard Corps (IRGC) is targeting vessels passing through “illegal routes” in the Strait of Hormuz. Exchanges of fire between the Houthis and Saudi Arabia have further dampened the market mood.

US economic releases offered contrasting signals: business activity grew, but consumer sentiment weakened.

Higher energy costs and expectations of interest rates staying elevated for longer under the Federal Reserve (Fed) drove the University of Michigan Consumer Sentiment Index to a five-month low in October. The index slipped from 48.1 to 48. Although inflation expectations were steady compared with the previous report, they remained above the Fed’s 2% target. Consumers expect inflation of 4.7% over the next 12 months and 3.5% over a 5-year horizon.

Preliminary US Services and Manufacturing Purchasing Managers’ Index (PMI) readings released by S&P Global showed a rise in manufacturing activity from 55.9 to 56 in October. Services activity, by contrast, eased from 58.8 to 57.9, in line with analysts’ expectations.

Oil continues to draw support from geopolitical tensions. West Texas Intermediate (WTI), the US crude benchmark, has gained over 4% to move back above $100. The prospect of persistently high energy prices consequently raises the likelihood of the Federal Reserve increasing rates to return inflation to its 2% target.

Money markets have nevertheless ruled out a rate increase at next week’s Fed meeting, despite these developments and last week’s exceptionally strong consumer and producer inflation readings. For December, however, Prime Terminal puts the probability of a hike at 78%.

The US calendar next week begins with the Fed’s meeting on Tuesday and Wednesday. Thursday then brings the core Personal Consumption Expenditures (PCE) Price Index, the Fed's preferred measure of inflation.

XAU/USD technical analysis: Does Gold’s break below $4,000 put $3,900 in sight?

Buyers are pushing back after sellers drove Gold to a three-month low of $3,975. Their efforts have brought bullion towards $4,000, with the price now trading around that level.

The balance between buyers and sellers nonetheless remains tilted towards the bears. Successive lower highs and lower lows continue to define the market structure, while momentum points to further declines as the RSI (14) approaches a test of oversold territory.

If the decline continues, XAU/USD would first encounter support at the day’s low of $3,975. A break below would bring the July 17 low of $3,959 into focus, followed by the year-to-date (YTD) low of $3,941.

A recovery would require bulls to regain $4,10 before the $4,200 level comes into view. Above that, the next levels are $4,224 at the 100-day Simple Moving Average (SMA), $4,302 at the 50-day SMA, and then $4,500.