Gold Prices Hit One-Week High as Oil Falls, Fed Rate Outlook Weighed

Gold prices climbed for a second consecutive session on Friday, reaching a one-week high as declining oil prices strengthened demand for the precious metal. Investors also assessed the Federal Reserve's interest rate outlook amid persistent inflation concerns and uncertainty surrounding the Middle East conflict.

Spot gold surged 1.5% to $4,196 per ounce by 16:30 ET (20:30 GMT), while U.S. gold futures advanced 1.5% to $4,218.97 an ounce. The gains put bullion on track for a weekly increase despite continued pressure from a stronger U.S. dollar.

The dollar resumed its upward momentum following a brief pause, making gold more expensive for buyers holding other currencies. ING analysts warned that dollar declines could remain limited as fragile bond markets and expectations of tighter Federal Reserve monetary policy continue supporting the greenback.

Meanwhile, oil prices declined after President Donald Trump announced that the United States would not launch military strikes against Iran before November's midterm elections. However, crude prices remained volatile throughout the week as investors monitored potential energy supply disruptions caused by the ongoing Middle East conflict.

Elevated energy costs have intensified inflation concerns, increasing expectations that major central banks could continue raising interest rates. The Federal Reserve already increased borrowing costs in September as policymakers sought to contain inflationary pressures.

St. Louis Federal Reserve President Alberto Musalem reinforced expectations of tighter monetary policy on Thursday, suggesting additional interest rate increases may be necessary to return inflation to the central bank's 2% target.

Musalem indicated that borrowing costs could rise further over the next six to nine months. However, he did not specify whether he would support another rate hike during the Fed's October 27-28 policy meeting.

According to CME FedWatch data, traders assigned an 18% probability to an October interest rate increase and an 82% chance of a December hike.

Higher interest rates typically create challenges for gold prices because bullion does not generate interest income, making yield-bearing investments more attractive.

Despite these pressures, gold maintained its upward momentum as falling crude prices and geopolitical uncertainty influenced investor sentiment. Market participants will closely monitor upcoming Federal Reserve signals, U.S. dollar movements, and developments in the Middle East for further direction in gold prices.