The conflict in the Middle East has driven up oil prices, heightened inflation risk, and increased the likelihood that central banks will maintain high rates or even raise them in response. As a result, non-yielding gold is under pressure and trying to hold the psychologically important $ 5000-per-ounce mark ahead of the FOMC meeting.

There is a prevailing market sentiment that Jerome Powell's hawkish rhetoric during the press conference and the confirmation of derivative assessments for one act of monetary expansion in 2026 in the updated FOMC forecasts will boost Treasury yields and strengthen the US dollar. Such an environment is extremely unfavorable for the precious metal. RJO Futures believes that XAU/USD could plunge to 4200 if US Treasury market rates continue to rise.

Gold Premium Dynamics in Shanghai and London

On the gold side, strong demand for physical metal plays a crucial role. After the Lunar New Year, Chinese investors poured about 17 billion yuan ($2.5 billion) into local ETFs. Their interest in the precious metal keeps the premiums between Shanghai and London positive, which softens the decline of XAU/USD.

UBS Group believes investors are fixated on the threat of inflation rising. However, as the conflict in the Middle East develops and the Brent rally continues, the global economy will come under pressure. The risks of a global recession will rise, prompting governments to resort to fiscal stimuli and central banks to adopt more accommodative monetary policies. The headwind for gold could shift to a tailwind, allowing XAU/USD to form a bottom and commence a prolonged rally downward.

Current issues for the precious metal stem not only from concerns about central banks maintaining high rates but also from the US dollar's dominance in the struggle to retain status as the primary safe-haven asset. For the past two years, gold has been considered the best reliable haven. This defeat has dealt a painful blow to the bulls' egos in XAU/USD.

Nevertheless, history shows that during periods of financial market disruption, investors initially rush to cash. They prioritize liquidity, and the US dollar becomes the preferred choice. However, as time goes on, funds are redistributed into other assets, and gold can become the main beneficiary of this process.

XAU/USD could rise even sooner if the Fed adopts a dovish stance rather than hawkish rhetoric. The dissenting views of Stephen Mirin, Christopher Waller, and Michelle Bowman risk altering forecasts. If two acts of monetary expansion appear in 2026 instead of one, the precious metal will launch a counterattack.

Technically, the daily chart of gold shows a replay of the 1-2-3 mother-and-child pattern. The so-called "model within a model" increases the risk of a pullback from the upward trend. The inability of the precious metal to reclaim the $5,000-per-ounce mark will prompt selling.