Gold has been relatively quiet below the psychological resistance level of $2,000 as traders fear a further escalation of the conflict between Israel and Hamas and await the Federal Reserve's decision on interest rates.
In the case of a hawkish forecast, the rise in U.S. Treasury yields may intensify. In such a situation, the demand for the dollar will increase, and the price of gold is likely to fall.
Recent economic data has confirmed the stability of the U.S. economy. At the same time, inflation remains above the Fed's 2% target, leaving room for the Fed to maintain its hawkish policy.
Fed Chairman Jerome Powell commented earlier that the high inflation rate leaves open the possibility of further rate hikes as the economy remains surprisingly hot.
The 10-year Treasury yield fell from nearly 5% to 4.84% ahead of the Fed meeting, but is still high and weighing on U.S. financial markets.
The U.S. Dollar Index (DXY) is down from its peak of 106.40 before the Fed's policy announcement.
Also, gold's rally has stalled as Israel's more measured approach to the invasion of Gaza has eased fears of a widening crisis in the Middle East, further undermining the safe-haven price of gold.
Short-term demand for gold remains bullish as investor attention remains focused on the Middle East, with Israeli troops gradually entering Gaza for a ground assault.
At the time of writing, the price of XAU/USD has settled around $1,998.
From a technical point of view, the Relative Strength Index (RSI) on the daily chart has moved out of overbought territory, supporting the prospects of short selling on a decline in gold. Any further decline is more likely to find support near the horizontal resistance level of 1,985 dollars.
A break of this level could trigger some technical selling and push XAU/USD towards the $1,964 intermediate support level on the way to last week's low of $1,954.
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