Gold subdued as the US dollar outshines it

XAU/USD analysis

The Middle East conflict has entered its third week with little sign of a let-up, as both sides maintain a defiant stance. Military operations have also intensified macroeconomic uncertainty, causing energy supply disruptions that spark a spike in oil prices and complicate monetary policy amid a wave of central bank decisions this week.

Despite an initial rise at the onset of the strikes, gold has failed to benefit from heightened geopolitical and economic uncertainty. This is largely due to the USDOLLAR emerging as the safe haven of choice during this turbulent period. Greenback strength and bullion's underperformance are compounded by a hawkish repricing of Fed rate cut expectations, as inflationary risks from higher energy prices could make additional easing harder.

As a result, XAU/USD dropped during the last two weeks and the breach of the EMA200 challenges the bullish outlook, leaving it vulnerable to deeper pullbacks toward 4,500. Nonetheless, gold tries to stabilise this week. Structural demand drivers remain intact and the greenback could face renewed pressure, keeping the road open to new XAU/USD record highs.

The USDOLLAR shed 4% in 2025 and remains down this year, falling victim to disruptive trade policies, macroeconomic uncertainty, Fed independence fears and fiscal concerns. None of those factors have gone away and a prolonged conflict could play into these fears and accelerate diversification and currency debasement trends.

Gold is the key beneficiary of such trends and could rise again should the dollar pull back. Furthermore, the Fed could look through a potentially temporary energy shock and the next chair may be more attuned to President Trump's preference for lower borrowing costs. This could lead to additional easing, a headwind for the greenback and a tailwind for non-yielding assets like gold.