Gold falls toward $4,050 as escalating Middle East tensions heighten inflation concerns.

Gold prices dropped sharply toward the $4,050 level during the early Asian trading session on Friday. Renewed military tensions in the Middle East have heightened concerns about rising inflation, putting pressure on the precious metal. Meanwhile, investors are increasingly pricing in the possibility of tighter monetary policy, with markets currently assigning a 35.8% probability of a Federal Reserve rate hike in July.

Gold Retreats Toward $4,050 as Middle East Tensions Boost Fed Rate Hike Expectations

Gold (XAU/USD) came under selling pressure during Friday’s early Asian trading session, slipping toward the $4,050 level after recently reaching a two-month high. The decline follows a surge in oil prices driven by escalating geopolitical tensions in the Middle East, which has strengthened market expectations that the US Federal Reserve could resume interest rate hikes as early as next week.

Concerns over a broader regional conflict intensified after Yemen’s Iran-backed Houthi group claimed responsibility for attacks on two Saudi oil tankers in the Red Sea, while the United States continued its military strikes against Iran for a 13th consecutive night. The developments have heightened fears of further instability across the region.

Adding to market anxiety, US President Donald Trump warned that any additional Houthi attacks would trigger significant military retaliation against both the Houthis and Iran. Trump also revealed that he is considering a large-scale military operation against Iran, describing it as potentially the biggest action undertaken so far and indicating that a decision could be imminent.

The resulting spike in crude oil prices has reignited inflation concerns, prompting investors to increase their expectations for tighter US monetary policy. According to CME FedWatch data, markets are currently pricing in a 35.8% probability of a Fed rate increase this month and an 82.1% chance of at least a 25-basis-point hike in September. Higher interest rates typically weigh on non-yielding assets such as gold.

Analysts at TD Securities remain cautious on the outlook for the precious metal, arguing that the current interest rate and currency environment does not support a meaningful increase in bullish gold positions. They also note that continued oil price gains linked to the Middle East conflict could further raise the likelihood of Fed tightening, limiting the potential for sustained upside in gold prices over the near term.