Gold Attracts Safe-Haven Flows as Tensions in the Middle East Escalate
On Thursday, the gold (XAU) price rose by 0.85% due to the growing demand for safe-haven assets as the conflict in the Middle East continued to unfold.
Even though yesterday's US macroeconomic reports were largely better than expected, XAU/USD rallied strongly as geopolitical uncertainty in the Middle East decreased the bearish impact of economic data. The US designated Yemen's Houthi rebels a global terrorist organisation following their assault on a second US-operated ship in the Red Sea within a week. At the same time, Raphael Bostic, the President of the Atlanta Federal Reserve (Fed), voiced his readiness to consider an earlier interest rate reduction if inflation continues to slow. Still, investors' uncertainty about an imminent rate cut in March is increasing. Thus, the probability of a 25-basis-point (bps) rate cut in Q1 currently stands at just over 50%, according to the CME FedWatch tool.
XAU/USD was relatively flat during the Asian and early European trading sessions. Investors now focus on the US Michigan Consumer Sentiment report to be released today at 3:00 p.m. UTC. If the data is below expectations, it could push XAU/USD towards 2,030. Better-than-anticipated numbers might trigger a decline in the pair. 'Spot gold may retrace to $2,016 per ounce, as it faces resistance at $2,025,' said Reuters analyst Wang Tao.
The Euro Moves in a Tight Range as Traders Expect The ECB to Be Less Dovish Than the Fed
On Thursday, the euro (EUR) continued to move within a tight 1.08400–1.09000 range but finished the day essentially unchanged.
Better-than-expected macro data from the US only had a minor bearish impact on EUR/USD. It seems that traders are prepared to buy the dips in EUR/USD as they expect the Federal Reserve (Fed) to be more aggressive in cutting rates than the European Central Bank (ECB). Indeed, ECB President Christine Lagarde said she expects an interest rate cut no earlier than the summer of 2024. Meanwhile, the market continues to price in a 51% probability that the Fed will cut rates in March.
EUR/USD was rising slightly during the Asian and early European trading sessions. Today, traders will focus on the release of the US Consumer Sentiment report at 3:00 p.m. UTC. The last report was better than expected, putting bearish pressure on EUR/USD. This time, the data may have a subtle effect on the EUR/USD exchange rate as traders await next week's ECB interest rate decision. Still, strong consumer confidence data should support the US dollar as it lowers the chance for a rate reduction.
GBP Declines as the UK Report Suggests the Economy Is in a Recession
The British pound (GBP) gained 0.26% on Thursday but lost most gains earlier today after a disappointing U.K. Retail Sales report.
British retail sales volumes decreased by 3.2% in December compared to November, the biggest decline in nearly 3 years, the Office for National Statistics said on Friday. GBP/USD immediately dropped but remained above the critical 1.26000 level. Worse-than-expected retail sales figures increase the risk that the U.K.'s economy might have contracted in Q4, the second consecutive quarter. Also, the report increases the possibility of an earlier interest rate cut from the Bank of England (BOE). However, U.K. inflation isn't low enough to guarantee an early rate reduction. Overall, the regulator has to find the balance between tackling high inflation and avoiding an economic recession.
GBP/USD was flat during the Asian trading session but weakened in the early hours of the European session. Today's US Consumer Sentiment report at 3:00 p.m. UTC might trigger additional volatility in GBP/USD. Higher-than-expected numbers will likely extend the short-term bearish trend in the pair, possibly pulling GBP/USD towards 1.26500. If figures are lower than the forecast, GBP/USD may temporarily rise towards 1.27000.