Gold drops below $4,000 as oil rally intensifies weekly sell-off ahead of Fed

• Gold slides beneath $4,000 as its weekly decline approaches 3.90%.
• Escalating Middle East hostilities drive WTI above $100.
• Ahead of FOMC and PCE releases, the probability of a December Fed rate rise reaches 78%.

Rising energy prices are increasing the likelihood that major central banks could tighten monetary policy to curb inflation, leaving Gold (XAU/USD) on course for a weekly loss. The metal's decline continued on Friday, with prices falling nearly 0.60%. Having touched a three-month low of $3,975, XAU/US is hovering near $4,000 at the time of writing.

XAU/USD loses nearly 4% over the week as rising energy prices heighten global inflation risks

An intensifying Middle East conflict has left bullion heading for a weekly fall of almost 3.90%. According to newswire reports, the US and Israel are preparing to attack Iran after the US midterm elections, while the Islamic Revolutionary Guard Corps (IRGC) is attacking vessels passing through “illegal routes” in the Strait of Hormuz. Exchanges of fire between the Houthis and Saudi Arabia are also weighing on sentiment across financial markets.

US economic releases presented a mixed picture: business activity grew, but consumer sentiment weakened.

Higher energy prices and expectations that the Federal Reserve (Fed) will leave interest rates elevated for longer drove the University of Michigan Consumer Sentiment Index down from 48.1 to 48 in October, its lowest reading in five months. Although inflation expectations were unchanged from the previous report, they remain above the Fed's 2% target. Consumers anticipate inflation of 4.7% over the next 12 months and 3.5% over a 5-year period.

S&P Global's preliminary US Services and Manufacturing Purchasing Managers’ Index (PMI) readings showed manufacturing activity strengthening to 56 in October from 55.9. Services activity, by contrast, eased to 57.9 from 58.8, in line with analysts' expectations.

Geopolitical developments are also supporting oil prices. West Texas Intermediate (WTI), the US crude benchmark, has risen more than 4% to move back above $100. Expectations of persistently high energy prices consequently make a Federal Reserve rate rise more likely as it seeks to return inflation to its 2% target.

Money markets have nevertheless ruled out a rate rise at next week's Fed meeting, despite these developments and last week's exceptionally strong consumer and producer inflation readings. For December, however, the probability stands at 78%, according to Prime Terminal.

The US calendar next week includes the Fed meeting on Tuesday and Wednesday. Thursday then brings the core Personal Consumption Expenditures (PCE) Price Index, the Fed's preferred inflation measure.

XAU/USD technical analysis: Gold breaks below $4,000 as sellers target $3,900

After sellers drove bullion to a three-month low of $3,975, Gold is trading around $4,000. Buyers are, however, resisting the selling pressure and lifting the metal towards $4,000.

The balance between buyers and sellers nonetheless remains tilted towards the bears. Successive lower highs and lower lows continue to define the market structure, while momentum points to further declines as the RSI (14) approaches a test of oversold territory.

If the decline continues, XAU/USD faces initial support at the session low of $3,975. A break below would put the 17 July low of $3,959 in focus, followed by the year-to-date (YTD) low of $3,941.

A recovery would first require bulls to regain $4,10, opening the way towards $4,200. Beyond that level, the next upside objectives are the 100-day Simple Moving Average (SMA) at $4,224, the 50-day SMA at $4,302 and $4,500.