Geopolitical Concerns Drive Gold Higher Despite the Strong US Dollar
The gold (XAU) price rallied by 1.67% on Monday even though stronger-than-expected retail sales data lowered the probability of an interest rate cut by the Federal Reserve (Fed) in July, strengthening the US dollar.
Safe-haven demand, spurred by geopolitical tensions in the Middle East, remains the key driving force behind the recent surge in XAU/USD. On Monday, Israel's Chief of the General Staff said that his country would respond to Iran's attack, which fuelled fears of a broader conflict in the region. Still, the market tends to digest geopolitical uncertainties fairly quickly, so the risk of a major downward correction in gold is increasing.
"In the near term, gold prices could fall towards $2,200 as the geopolitical premiums get washed out," said Daniel Pavilonis, the senior market strategist at RJO Futures.
At the same time, there appears to be a structural shift towards gold on the part of central banks as they seek to diversify their reserves to reduce the volume of the US dollar.
"It is unlikely that there will be a wholesale reversal to net selling in the near term despite the record gold price, as central bank buying tends to be strategic and insensitive to the price," analysts at Heraeus said in a note.
Meanwhile, the macro environment exerts downward pressure on gold as the recent upbeat US statistics have reduced the chances for an interest rate cut by the Fed this summer.
XAU/USD was essentially unchanged in the Asian and early European trading sessions. Today, traders should focus on speeches from Fed officials throughout the day. The important event will be Fed Chair Jerome Powell's speech at 5:15 p.m. UTC. Today’s speeches might provide insights into the sentiment inside the Fed and offer clues on future changes in interest rates. Additionally, any new developments in the Middle East will likely trigger volatility in XAU/USD.
"Spot gold may retrace into a range of $2,345–$2,354 per ounce, as a correction from the 12 April high of $2,431.29 looks incomplete," said Reuters analyst Wang Tao.
Euro Drops to a Five-Month Low
The euro (EUR) dropped by 0.19% on Monday as the US dollar moved higher due to growing tensions in the Middle East.
In addition, higher-than-expected US retail sales data supported the US dollar as chances for a rate cut from the Federal Reserve (Fed) this summer further decreased. According to interest rate swap market data, investors are currently pricing in only a 24% chance of an interest rate cut in June and a 56% chance of a cut in July. Meanwhile, traders expect the European Central Bank (ECB) to deliver its first rate cut in June and are pricing in almost 80 basis points (bps) of reductions by the ECB in 2024. The Eurozone's industrial production declined by 6.4% in annual terms in February, while German inflation remained close to the official 2% target rate. Thus, the latest statistics from the Eurozone have increased the chances that the ECB will begin easing monetary policy before the Fed does
EUR/USD was flat during the Asian and early European trading sessions. Today may be a volatile day for EUR/USD as the Eurozone releases its Trade Balance and ZEW Economic Sentiment Index reports at 9:00 a.m. UTC. Meanwhile, several Fed officials, including Fed Chair Jerome Powell, will give speeches in the American trading session. Powell will deliver his speech at 5:15 p.m. UTC. His remarks could reveal more about the sentiment inside the Fed and offer clues on the interest rate path trajectory. The technical bias remains bearish as the euro trades below 1.06600.
USD/CAD Rallies Over 1.38000 On Strong Risk-Off Flows
The Canadian dollar (CAD) lost 0.10% on Monday due to a stronger US dollar.
USD/CAD has been in an uptrend since 27 December 2023. The bullish trend has only strengthened due to growing geopolitical tensions in the Middle East and the decreasing possibility of an interest rate cut by the Federal Reserve (Fed) this summer. Indeed, the US economic data have been better than expected, prompting investors to scale back their interest rate cut expectations. Traders now expect the Bank of Canada (BOC) to deliver more rate cuts in 2024 than the Fed. However, the difference is relatively small, meaning that geopolitical concerns primarily drove the recent rally in USD/CAD, and the downward trend could dissipate very quickly in the case of de-escalation between Israel and Iran. Additionally, crude oil now trades at a six-month high, supporting the Canadian economy, which may encourage the BOC to adopt a less dovish stance in its monetary policy outlook.
USD/CAD was rising during the Asian and early-European trading sessions. Today, traders should focus on two events. Today's Canadian inflation report at 1:30 p.m. UTC is the most important event for CAD traders. If the figures are stronger than expected, the USD/CAD may correct downwards, possibly towards 1.37200. Otherwise, the underlying bullish trend in the USD/CAD may continue, pushing the pair higher towards 1.38400. The second event involves upcoming speeches by Fed officials, with Fed Chair Jerome Powell's speech at 5:15 p.m. UTC. His remarks could reveal more about the sentiment inside the Fed and provide traders with clues on the interest rate trajectory.