Escalating Middle East Tensions Push XAU/USD Higher
The gold (XAU) price rose slightly on Monday, driven by a slight retreat in the US dollar and increased safe-haven demand for bullion due to escalating Middle Eastern conflict.
"Gold is taking benefits from the slide in the US dollar and also the new escalation of tensions in the Middle East," said Carlo Alberto De Casa, the market analyst at Kinesis Money.
Israel is planning to continue its military operations in Gaza for an additional 6–8 weeks, aiming for a ground invasion of Rafah, the southernmost city in the enclave. Additionally, a U.K.-registered cargo ship exploded after being attacked near Yemen on Sunday. Overall, the US Dollar Index fell by approximately 0.1%, and a weaker US dollar makes gold less expensive for holders of other currencies.
Last week, reports indicated that US consumer and producer prices rose more than anticipated in January, while retail sales fell more rapidly than expected. Consequently, traders have postponed their expectations for the Federal Reserve to begin cutting interest rates to June, shifting from the initially anticipated easing of monetary policy in March. Now, the market predicts less than 100 basis points (bps) worth of rate reductions this year, a notable decrease from around 150 bps expected at the beginning of the year.
XAU/USD was rising during the early European trading session. Today, there are no major events on the economic calendar, so XAU/USD will probably continue moving within the established trend. The intensifying conflict pushes oil prices higher and boosts the attractiveness of safe-haven assets like US Treasuries, the US dollar, the Japanese yen, and gold. Nonetheless, strong US economic data limits XAU/USD's gains, suggesting the Federal Reserve might maintain its high base rate for longer. Today, traders should pay attention to developments in the Middle East. An escalation will likely drive the gold price up, whereas moves toward resolving the conflict could lead to a decline in gold prices. 'Spot gold looks neutral in a range of $2,012 to $2,021 per ounce, and an escape could suggest a direction,' said Reuters analyst Wang Tao.
The Euro Remains Under Downward Pressure
The euro (EUR) was moving sideways on Monday due to the US bank holiday.
According to the Bundesbank's monthly report on Monday, Germany is probably experiencing a recession: external demand is weak, consumer behavior is hesitant, and domestic investment is suppressed due to high borrowing costs. Growing energy prices have been challenging for Germany. Its industrial economy has been stagnant or declining for 4 consecutive quarters, impacting the entire eurozone.
"There is still no recovery for the German economy," stated analysts at the Bundesbank.
"Output could decline again slightly in the first quarter of 2024. With the second consecutive decline in economic output, the German economy would be in a technical recession," they noted.
Despite a shrink in the economy, the German government considers the current downturn temporary, influenced by unique challenges rather than fundamental flaws in economic strategy. According to the Bundesbank, economic weakness in Germany is expected to persist with declining foreign industrial demand and reduced investment due to higher financing costs. However, the Bundesbank doesn't think Red Sea shipping disruptions will significantly affect the economy. Moreover, the labor market is expected to remain relatively stable, preventing a severe recession.
In the Asian trading hours, EUR/USD experienced a decline but rose in the early hours of the European session. Today, the economic calendar lacks significant events, so trading activity will likely increase only later this week. EUR/USD rebounded from the support level of 1.07000 and is currently in a local bullish trend. However, fundamentally, the euro is still under pressure. EUR/USD has been weakening since the beginning of the year, and there is no strong momentum to reverse the trend.
USD/CAD Continues Rising Ahead of the Canadian CPI Report
The Canadian dollar (CAD) lost 0.03% in a quiet trading session on Monday despite a minor drop in the US Dollar Index (DXY).
USD/CAD's bullish trend, which started in mid-December 2024, remains intact. Investors have readjusted their interest rate expectations and now anticipate only 90 basis points (bps) worth of rate cuts by the Federal Reserve (Fed) this year, a sharp decline from around 145 bps expected at the beginning of February. Conversely, investors' expectations for the Canadian base rate have remained largely unchanged for the past 3 months. As a result, the Canadian dollar has depreciated by around 3% since December. The market is still pricing in roughly 70 bps worth of rate cuts by the Bank of Canada (BOC) this year, even though the price of crude oil—Canada's main export item—has been rising lately. Fundamentally, the Canadian dollar looks undervalued. However, the short-term technical bias for USD/CAD remains bullish as the pair trades above the critical 1.35000 level.
USD/CAD was rising during the Asian and early European trading sessions. Today, Statistics Canada will release a highly anticipated Consumer Price Index (CPI) report for January at 1:30 p.m. UTC, which may provoke sharp moves in all CAD pairs. The market expects the report to show a 3.3% rise in annual inflation. If the CPI figures are higher than expected, investors would likely decrease their expectations for a rate cut this summer. Thus, USD/CAD will probably decline sharply, possibly below 1.34600. However, if the report shows that the underlying price pressure is easing, it will fuel hopes that the Canadian central bank will start to cut interest rates soon. In this case, USD/CAD may continue to rise, possibly breaking above 1.35250.