Rising Geopolitical Tensions and Slowing US Producer Prices Push Gold Higher
The gold (XAU) price gained over 1% on Friday due to escalating tensions in the Middle East, while lower-than-expected US Producer Price Index (PPI) numbers increased the probability of the Federal Reserve (Fed) cutting interest rates in March.
As the US and Britain launched air strikes against Houthi forces in Yemen, Iran condemned the attack, warning that it would fuel insecurity and instability in the region. A rise in geopolitical risk has triggered safe-haven buying and pushed gold prices higher. Moreover, investors' interest rate expectations turned more dovish after the US reported a 0.1% decline in monthly PPI. According to the CME FedWatch tool, traders are now pricing in a 70% chance of a 25-basis-point (bps) rate cut in March, compared to a 65% chance before the release of the PPI report. 'Market participants continue to expect a soft landing of the US economy, allowing the Fed to cut rates over coming months,' said UBS analyst Giovanni Staunovo, adding that this should support gold prices.
XAU/USD was rising during the Asian and early European trading sessions. Today, trading activity could be relatively low. The US markets will be closed due to Martin Luther King Day, so volatility should begin to subside by 1:00 p.m. UTC. 'Spot gold may break resistance at $2,060 per ounce and rise into the $2,071–$2,079 range, said Reuters analyst Wang Tao.
EUR/USD Declines as Political Uncertainty Fuels Safe-Haven Flows into the US Dollar
The euro (EUR) lost 0.19% on Friday as the US dollar strengthened due to heightened geopolitical risks and despite a softer-than-expected inflation report.
US producer prices unexpectedly fell in December amid declining costs for goods such as diesel fuel and food, signaling that the inflation rate may continue to slow. 'Even though you wouldn't say overall that the macroeconomic picture is screaming at you that they need to cut that fast, the market seems to be excited about the prospect of cuts,' said Steve Englander, the Global Head of G10 FX Research and of North America Strategy at Standard Chartered Bank. Indeed, last week's US Consumer Price Index (CPI) report failed to encourage USD bulls. Overall, traders seem to be reluctant to accept macroeconomic data that contradicts their dovish view on the interest rate path. At the same time, investors tend to overreact to dovish reports of secondary importance.
Meanwhile, investors' outlook on the eurozone interest rate is not hawkish either. As of Friday, the market was pricing in about a 40% chance of a 25-basis-point (bps) rate cut from the European Central Bank (ECB) in March. The fundamental outlook for EUR/USD is mixed, suggesting that the pair may continue trading within the 1.08500–1.10000 range.
EUR/USD declined slightly during the Asian and early European sessions. The formal macroeconomic calendar is very light today, but unexpected events may happen in the Middle East, prompting investors to buy the US dollar because of its traditional safe-haven status. At the same time, it isn't yet clear if the US Congress can avoid another government shutdown. A short-term spending bill that Congressional leaders have agreed still needs to be passed before 19 January to avoid a partial shutdown. Any political uncertainty in the US may prompt investors to sell the US dollar and buy alternative assets, leading to a temporary rise in EUR/USD.
The U.K. Economic Data Show Signs of Recession
GBP/USD fell slightly by 0.1%, yet stayed relatively close to the 1-month high it reached last week.
On Friday, BofA Global Research announced it had revised its outlook on the U.K. monetary policy. Analysts expect the Bank of England (BOE) to maintain its interest rate at 5.25% until August, a shift from its previous prediction of a first rate cut in February 2025. Now, the team forecasts 25-basis-points rate cuts in Q3 and Q4. 'The U.K. will be the last of the major central banks to start the cutting cycle, and it is likely to move slower, at least compared with the ECB (European Central Bank),' BofA economists noted.
In November, the British economy grew a bit more robustly than anticipated yet still faced the risk of a mild recession, a potential challenge for Prime Minister Rishi Sunak ahead of the 2024 election. The Gross Domestic Product (GDP) increased by 0.3%, slightly above the 0.2% forecast, after a 0.3% decrease in October. However, the Office for National Statistics data showed a 0.2% contraction in output over 3 months— from September to November—more than the forecasted 0.1% decline. If GDP numbers show contraction or stagnant output in December, it will indicate a decline in GDP for Q4, indicating a mild recession.
During the Asian trading session, GBP/USD decreased but rose in the early hours of the European session. Today's macroeconomic calendar is uneventful, but unforeseen developments may occur in the Middle East. Escalation tensions usually prompt investors to flee towards safe-haven assets and buy the US dollar. Fundamentally, the pressure on GBP/USD remains bullish as traders expect the Federal Reserve to cut the rates more aggressively in 2024 than the BOE. However, the short-term technical bias is slightly bearish as the pair is trading below the important intraday level of 1.2765.