Fed Fragility Drives Diverging Dollar-Gold Paths

Key Takeaways:

*Sticky inflation hasn’t prevented markets from pricing in aggressive Fed easing, with political risks eroding the greenback’s safe-haven premium.

*Surging ETF inflows and falling U.S. real yields are powering bullion toward $3,500 as investors hedge against Fed credibility risks.

*Friday’s jobs report is pivotal: a weak print could cement September cuts and lift gold, while a strong reading risks delaying Fed action but won’t fully erase political headwinds.

Market Summary:

The U.S. Dollar Index (DXY) continued to edge lower this week as markets weighed firmer inflation data against weakening growth signals and mounting political uncertainty. July’s core PCE inflation climbed to 2.9% year-on-year, underscoring sticky price pressures. Yet, investors chose to emphasize evidence of economic cooling, from the Chicago PMI’s plunge to 41.5—the weakest since May—to subdued trade flows weighed down by tariffs and global supply chain disruptions. With Fed funds futures now pricing an 87% probability of a 25bps September cut, the greenback remains under pressure as investors anticipate pre-emptive easing to cushion growth.

Political risk has compounded the dollar’s woes. President Trump’s dismissal of Fed Governor Lisa Cook rekindled concerns about central bank independence, while an appeals court ruling against large portions of the administration’s tariff framework cast fresh doubt on policy continuity. These developments have shifted the narrative away from data resilience toward structural risks around U.S. governance, undermining institutional credibility and eroding the dollar’s safe-haven premium.

Gold, in contrast, has thrived on the same backdrop. Prices surged toward $3,440 per ounce as investors rotated into bullion, with falling U.S. real yields and dovish Fed expectations reducing the opportunity cost of holding non-yielding assets. Institutional demand has accelerated, highlighted by ETF inflows of nearly 15 tons in just two sessions—the strongest in months. Beyond inflation hedging, gold is increasingly viewed as a strategic shield against policy missteps and institutional fragility, with the Fed’s credibility under question.

Looking ahead, all eyes are on Friday’s U.S. Non-Farm Payrolls report. A downside surprise would likely cement September rate cut expectations, fueling further dollar weakness and clearing the path for gold to retest the $3,500 record high. Conversely, a strong print could delay the Fed’s hand and cap bullion’s near-term rally, though political headwinds may continue to undermine dollar sentiment regardless of economic resilience. In this environment, the dollar’s trajectory hinges not just on inflation and growth, but also on confidence in U.S. institutions while gold benefits directly from any cracks in that confidence.

Technical Analysis

DXY, H4

U.S. Dollar Index (DXY) is trading near 97.75 after retreating from the 98.10 zone, holding just above immediate support at 97.65. The index is hovering slightly below the 20-period moving average, while the 50-period MA around 98.00 is acting as a key pivot level. 

Momentum signals remain cautious. The Relative Strength Index (RSI) is at 39, reflecting a mild downside bias but not yet oversold. The MACD stays in negative territory, hovering below the zero line, indicating persistent bearish momentum though without strong acceleration.

On the upside, a decisive move above 98.10 would shift focus back to 98.75 and open the door toward 99.50 if buying interest builds. On the downside, a clear break below 97.65 would further weaken, potentially dragging the index toward the 97.10 zone.

Resistance levels: 98.10, 98.75
Support levels: 97.65, 97.10

XAUUSD, H4

Gold (XAU/USD) is trading near $3,471 after extending its rally above the $3,435 and $3,460 resistance zones, with price momentum accelerating toward the next key barrier at $3,495. Immediate support now lies at $3,435, followed by $3,400, as prior resistance levels begin to act as floors in the short term.

Momentum indicators remain strongly bullish but are flashing early signs of exhaustion. The RSI has surged to 81, deep in overbought territory, highlighting the risk of a corrective pullback if buyers lose steam. Meanwhile, the MACD is firmly in positive territory, with widening histogram bars confirming strong buying pressure, though momentum may be stretched.

Overall, XAU/USD stays in a powerful uptrend above $3,435, with bulls eyeing a push toward $3,495 and potentially $3,520 if momentum persists. However, the overbought RSI suggests near-term consolidation or a dip back toward $3,435 cannot be ruled out before the next leg higher.

Resistance levels: 3495.00, 3520.00
Support levels: 3435.00, 3400.00