Gold Forecast: XAU/USD Faces Headwinds as Dollar Strengthens and Fed Signals Hawkish Stance

Gold price softens near the $4,030 level during Asia’s early trading hours on Tuesday, as market participants reassess their interest rate cut expectations. The weakness reflects a combination of factors reshaping trader sentiment in the precious metals space.

Fed Policy Shift Pressures Gold Outlook

The most significant headwind for gold comes from revised rate cut probabilities. According to the CME FedWatch tool, markets are currently pricing in just a 45% likelihood of a 25 basis point rate reduction in December—a notable retreat from the 60%+ expectations traders held just a week earlier. This shift stems from increasingly hawkish commentary from Federal Reserve officials.

Several Fed policymakers have recently signaled a more cautious stance on monetary easing. Atlanta Fed President Bostic and Kansas City Fed President Schmid have both expressed concerns about persistent inflation and indicated openness to maintaining current rate levels. These remarks have effectively cooled the bullish narrative that previously supported gold prices.

UBS analysts offer a sobering assessment: even with fresh economic data expected before December’s policy meeting, the accumulating statistics are unlikely to reverse the growing market conviction favoring a third rate cut this year. This sentiment underscores the fragility of gold’s near-term support levels.

Dollar Strength Compounds Gold’s Weakness

Adding pressure to bullion, the US Dollar has now appreciated for three consecutive trading sessions. A stronger greenback makes gold more expensive for international buyers holding alternative currencies, creating a natural headwind for precious metal demand.

Market Catalysts Ahead

Investors will scrutinize the upcoming US September Nonfarm Payrolls report on Thursday for clues about labor market health and Fed policy trajectory. Meanwhile, China’s reported addition of 15 tons to its gold reserves in September demonstrates continued central bank interest in the metal, potentially providing a floor for downside moves.

The convergence of hawkish Fed signals, dollar strength, and softened rate cut expectations has combined to keep gold trading under pressure, with the XAU/USD pair struggling to recover above immediate resistance.