Photo by Zlaťáky.cz on Unsplash

The gold price plunged at the start of the week as the dollar rallied across the board amid risk aversion that was triggered by rising expectations for a more aggressive Fed rate hike this week. The non-yielding metal failed to capitalize on the risk-averse environment as the buck rallied to fresh two-decade highs beyond the 105.00 figure.

Early on Tuesday, the XAUUSD pair extended losses to nearly one-month lows around $1,813 before bouncing slightly. The gold price has settled in the $1,820 area ahead of the opening bell on Wall Street, struggling to stage a sustained recovery as the USD index held onto gains around 105.00, with dollar bulls dominating the market ahead of the two-day Federal Reserve meeting that concludes on Wednesday.

A strong inflation report is likely to lead the US central bank to consider a 75 bps rate hike at the upcoming meeting after raising it by 50 bps last month. In this scenario, the dollar could extend the ascent to fresh multi-year highs, with the next target arriving at 107.00, followed by the 110.00 key hurdle (in the longer run).

In turn, the USD’s rally would send the precious metal lower from the current levels in the coming days. On the downside, the market focus now shifts back to the $1,800 figure, followed by the $1,786 area that capped the pressure last month.

Should the central bank disappoint, however, XAUUSD may witness a solid bounce as the buck will have to give up recent gains in case the Fed refrains from a more aggressive step and raises rates by 50 bps? The initial support for the USD index now arrives around 104.20, followed by the 103.30 region.