Oil Shock Reshapes Fed Bets as Dollar Gains

Key Takeaways:

*USD holds near two-week high as markets price a ~93% chance of a Fed hike on Wednesday.

*Oil above $100 is intensifying inflation concerns and supporting expectations for tighter Fed policy.

*US 10-year yields briefly topped 5%, strengthening the dollar while increasing pressure on gold.

Market Summary:

The US dollar remains firm near a two-week high, with the Dollar Index around 99.5, as markets increasingly price an almost certain Federal Reserve rate hike at Wednesday’s meeting. Fed hike expectations have climbed toward 93%, up sharply from around 60% a week earlier, following sticky August inflation data and the renewed surge in oil prices. The expected 25-basis-point hike would mark the first Fed rate increase in several years, but with the move already heavily priced, attention is shifting toward Fed Chair Kevin Warsh’s guidance and the updated dot plot for clues on whether further tightening could follow. At the same time, the escalation in the Middle East has strengthened demand for the dollar as a defensive asset, while weaker equity sentiment and renewed pressure on AI and technology shares have provided additional support.

The latest oil supply shock is reinforcing the dollar’s strength while weighing on gold. Brent has climbed above $106–$107 a barrel, while WTI remains above $100, following attacks on Saudi energy infrastructure, the shutdown of the East-West pipeline and continued disruption around the Strait of Hormuz. The risk of prolonged supply disruptions has raised concerns that energy inflation could remain elevated, increasing expectations that the Fed may need to maintain a tighter policy stance for longer. This has pushed US Treasury yields sharply higher, with the 10-year yield briefly crossing 5% before easing back toward the 4.9% area. Higher yields and a stronger dollar increase the opportunity cost of holding non-yielding gold, limiting bullion’s ability to benefit from its traditional safe-haven demand.

Gold has therefore remained under pressure around the $4,270–$4,300 area, despite the intensifying geopolitical risks. Recent US inflation data showed headline CPI rising 0.4% month-on-month and 3.4% year-on-year, while core CPI increased 0.3%, reinforcing concerns that inflation could remain sticky. The combination of higher oil prices, elevated inflation expectations and rising Treasury yields has shifted the market focus toward monetary-policy risk rather than purely geopolitical risk. While the Iran conflict, uncertainty around Hormuz shipping and concerns over US fiscal conditions continue to provide an underlying safe-haven and store-of-value argument for gold, these factors have so far been outweighed by the stronger dollar and higher yields.

Across currencies, EUR/USD remains around the 1.15 area, while USD/JPY has recovered toward 154–155 after the yen reached a roughly seven-month high near 152.9 last week. The dollar’s rebound has been driven primarily by broad-based USD strength, although the yen remains supported by expectations of a Bank of Japan rate hike on Friday and signs of stronger speculative positioning. Looking ahead, the key risk for both markets is the Fed’s communication: a hawkish message signalling additional tightening could extend dollar gains and keep pressure on gold, while a dovish signal that frames the hike as an insurance move could trigger a reversal in the dollar and allow gold to recover. Oil prices, Treasury yields and central-bank guidance therefore remain the key cross-asset drivers for both USD and gold.

Technical Analysis 

GOLD, H4:

Gold remains under near-term bearish pressure after failing to sustain the rebound toward the 4,450–4,520 resistance zone. Price has continued to form lower highs beneath the descending trendline and is now trading around 4,310, close to the 4,310 support level. The recent decline has also pushed price below the 4,375 support, keeping the short-term structure tilted to the downside. A sustained break below 4,310 could expose the next support at 4,220, while a recovery above 4,375 would be needed to ease the bearish structure.

Momentum indicators also remain relatively weak. RSI is around 42, below the 50 neutral level, suggesting that bearish momentum still has the upper hand, although it is not yet in oversold territory. MACD remains below the zero line while the histogram remains negative. This indicates that downside momentum has not fully reversed despite some stabilization around current levels.

Looking ahead, gold may continue to consolidate or move lower while remaining below the descending trendline and 4,375 resistance. Overall, the chart remains bearish-to-neutral, with 4,310 serving as the key level to watch.

Resistance Levels: 4375.00, 4450.00

Support Levels: 4220.00, 4100.00