Spot gold extended its weak performance during Asian trading on Monday, with prices slipping back to near the $4,350 mark.

The pullback comes after the latest US inflation figures reinforced market expectations that the Federal Reserve will deliver another interest rate increase this week, prompting investors to reassess the trajectory of future policy tightening. This has kept the US dollar and Treasury yields relatively firm, creating headwinds for the non-yielding precious metal.

The data showed the US core consumer price index rose 0.3% month-on-month in August, accelerating from July's 0.2% gain and also coming in above the 0.2% that economists had forecast. With headline inflation still being pressured higher by rising energy prices, another above-consensus core reading has solidified the view among traders that the Fed will maintain its restrictive policy stance. Market participants had already raised their expectations for a rate increase following signs of building producer-side price pressures, and the core CPI print has only served to intensify those bets.

Shifting dynamics in the rates market are now the primary catalyst behind gold's descent in the near term. Market pricing suggests the probability of a 25-basis-point hike at the Fed's September meeting has climbed to roughly 86%, a notable jump from the approximately 72% seen before the producer price data was released. As such, the market's focus has pivoted from whether the Fed will act this week to what signals the central bank might offer regarding the subsequent path of rates.

Typically, a higher interest rate environment bolsters the appeal of yield-bearing assets while increasing the opportunity cost of holding gold, thereby weighing on bullion prices. When rate hike odds are quickly repriced higher, gold becomes particularly susceptible to pressure from a stronger dollar and rising Treasury yields. The recent retreat in spot gold from its highs partly reflects an unwinding of long positions that had been built up earlier.

That said, there is no clear evidence yet of a decisive one-way bearish turn in the gold market. Despite the firm US inflation data, rising Fed rate-hike probabilities, and international energy prices staying elevated, bullion has managed to hold above the critical $4,300 support zone. This resilience indicates that long-term allocation funds have not fully abandoned the market.

The inflation risk stemming from higher energy costs cuts both ways for gold. On one hand, it may force the Fed to keep rates higher for longer, creating short-term downward pressure. On the other, elevated oil prices could amplify uncertainties surrounding global economic growth and financial market stability, thereby sustaining some safe-haven demand for the metal. Consequently, gold is caught in a clear tug-of-war between opposing forces.

Bearish influences include the re-acceleration of US inflation stoking fears of further Fed tightening, with the widening dollar rate advantage likely to keep a cap on bullion prices. Bullish factors include persistently elevated energy prices, global supply risks, and an uncertain economic outlook, all of which continue to attract dip-buying interest during pullbacks.

Several institutions suggest that gold's ability to find support in high territory shows the precious metals market retains some resilience to shifts in interest rate expectations. Even as the market digests a higher probability of Fed action, gold has not broken down below its key medium-term trend support. This implies lingering investor concerns over inflation risks and macroeconomic uncertainty are still limiting the scope for a more pronounced decline.

This week's primary focus is undoubtedly Wednesday's FOMC rate decision. Should the Fed deliver a quarter-point hike as widely expected and reiterate that inflation risks remain elevated, the dollar could gain further traction, potentially inflicting fresh downside pressure on gold. However, with a high hike probability already priced in, the real driver of gold's short-term direction will be the Fed's guidance on future policy.

If the Fed raises rates but accompanies the move with a more cautious tone in its statement and the Chair's press conference—suggesting that current inflation pressures are largely fueled by energy factors and stopping short of signalling consecutive hikes—the market may scale back expectations for further tightening, offering gold a chance to rebound.

Conversely, if the policy language leans clearly toward continued tightening, gold prices could test key support levels below the $4,300 mark. The ongoing rise in oil prices is reshaping global inflation expectations. If energy costs keep climbing, subsequent US inflation data may remain sticky, which would act as a significant macro headwind limiting gold's recovery.

However, if high oil prices begin to noticeably undermine economic growth, rising concerns about future economic risks could once again enhance gold's safe-haven appeal. The interplay between Fed policy, energy prices, and growth dynamics will ultimately determine the direction of gold price movement following this week's rate decision.

Looking at the daily chart, spot gold is currently in a neutral consolidation phase after its pullback from highs. Prices are hovering around the $4,350 level and holding above the 100-day moving average near $4,330, suggesting the medium-term trend support remains intact for now. Nevertheless, the metal is still capped by the 20-day moving average (middle Bollinger Band), indicating bulls have yet to reclaim short-term control.

The 14-day Relative Strength Index (RSI) stands at approximately 47.11, sitting in neutral territory. This reflects that the recent correction has significantly cooled downside momentum without yet reaching extreme oversold conditions. On the daily chart, initial support is seen at the 100-day MA near $4,330. A decisive break below this level could open the door for bears to target the lower Bollinger Band around $4,250. To the upside, focus is on the 20-day MA midpoint near $4,460. Only a sustained move back above this level would signal a resumption of more meaningful upward momentum, with further resistance then located around $4,680.

On the 4-hour chart, gold has displayed a choppy, weaker bias recently, seeking a new equilibrium between $4,330 and $4,460 after falling from its peaks. The $4,330 level has emerged as an important near-term support zone. If the 4-hour timeframe can hold above this level, bulls may still find the impetus to push prices back toward $4,400 and then $4,460. A breakdown below $4,330, however, would likely embolden bears and increase the risk of testing supports at $4,300 and $4,250. Short-term momentum indicators remain cautious, and market attention will be on whether gold can reclaim the $4,400 level ahead of the Fed decision. A break and stable hold above $4,400 could alleviate near-term selling pressure. Conversely, repeated rejection beneath $4,460 could keep gold trapped in a high-level consolidation with a downward bias.

In summary, stronger-than-expected core US inflation has pushed market pricing for a Fed rate hike this week to an elevated level. The accompanying strength in the US dollar and Treasury yields is weighing on gold in the short term, pulling spot prices back to around $4,350. However, prices are still defending the key medium-term support near $4,330, showing that a definitive trend reversal has yet to take hold.

In the near term, the FOMC rate decision and subsequent policy guidance will be decisive for gold's direction. The $4,330 level acts as a crucial downside watershed, while $4,460 represents the key resistance bulls need to overcome to regain their advantage. Should the Fed's stance prove less hawkish than market expectations, gold could see a rebound. If the central bank doubles down on its tightening signals, however, prices may need to remain vigilant about a slide toward the $4,250 support area.