Gold prices retreated below the $3,400 level on Tuesday despite deteriorating risk appetite as overall US Dollar (USD) strength drove the yellow metal lower. Nevertheless, the escalation of the Israel–Iran conflict would likely underpin the precious metal due to its safe-haven appeal. At the time of writing, XAU/USD trades at $3,380, down 0.05%.

Market mood is downbeat, but Bullion has failed to rally as the US Dollar stages a comeback. The US Dollar Index (DXY), which tracks the performance of the Dollar against six major currencies, is up 0.46% at 98.58.

On Monday, US President Donald Trump abruptly exited the G7 meeting in Canada due to developments in the Middle East. He posted on his social network that "Everyone should immediately evacuate Tehran," in a clear signal of an escalation of the conflict that erupted last Friday.

Earlier news sources revealed that Trump is evaluating joining Israel to attack Iran. As of writing, Walla News/Axios, citing senior US officials, said that Trump is seriously considering attacking Iran and is holding a crucial meeting with his advisers.

Even though sentiment remains the main driver, economic data in the United States (US) was weaker. US Retail Sales in May were mixed with monthly figures contracting, while in the 12 months to May they rose. Industrial Production, revealed by the Federal Reserve (Fed), shrank in May.

Traders are bracing for the Fed's decision. Fed Chair Jerome Powell and other Fed governors began their "conclave" and are expected to hold rates unchanged. It is worth noting that policymakers would update their economic projections, which would signal the monetary policy path toward the second half of 2025.

Win Thin, Global Head of Market Strategy at BBH, revealed that he expects a dovish tilt by the Fed but noted that "we see some risks of a hawkish shift in the Dot Plots, as it would take only two officials to move from two cuts to one to get a similar move in the 2025 Dot."

Source: Fxstreet