Gold Rises Towards Record Highs on Intensifying Geopolitical Unrest
Gold (XAU/USD) climbed towards $2,475 on Monday, close to record highs, as heightened geopolitical tensions bolstered its safe-haven appeal.
Persistent tensions in the Middle East, with no signs of a ceasefire, continue to fuel demand for gold. The deteriorating sentiment is largely driven by ongoing developments in the region, where the absence of ceasefire efforts from Israel, Lebanon, and Iran has left market participants cautious.
This uncertainty has prompted investors to favor safe-haven assets such as gold as the possibility of the conflict escalation remains. Meanwhile, US Treasury bond yields have decreased ahead of the upcoming US inflation data releases this week.
Additionally, the conflict on the Russia–Ukraine border continues to unfold. This development and market expectations of a more substantial 50-basis-point (bps) interest rate cut by the Federal Reserve (Fed) in September continue to support the non-yielding yellow metal.
However, gains for gold remain limited due to prevailing positive risk sentiment and traders adopting a cautious stance ahead of the upcoming critical US inflation data.
Gold declined during the Asian and early European trading sessions. Today's key event is the US Producer Price Index (PPI) report at 12:30 p.m. UTC. The data will help determine the future US interest rate path.
The chances of a rate cut in September are currently evenly split between a 25-bps rate cut and a 50-bps reduction, according to the CME FedWatch Tool.
If the PPI figures are stronger than expected, gold may drop to $2,450. Conversely, lower-than-expected numbers may drive gold higher.
"Spot gold may rise into the $2,511 to $2,559 range, as it is about to climb above a neutral zone of $2,358 to $2,473 per ounce", said Reuters analyst Wang Tao.
Euro Climbs in Anticipation of the US PPI Report
On Monday, EUR/USD moved slightly upwards, reaching a resistance level of 1.0940 and gaining 0.15%. Meanwhile, the US Dollar Index (DXY) remained relatively stable, with no significant changes.
US Producer Price Index (PPI) data will be released today at 12:30 p.m. UTC. The data may influence markets as it foreshadows the Personal Consumption Expenditures (PCE) Price Index report on Wednesday, an important inflation measure for the Federal Reserve (Fed).
The forecasts indicate a 0.2% increase in both the headline and core PPI numbers. However, the most significant event will be the release of the US Consumer Price Index (CPI) and Retail Sales reports.
The data may significantly impact the Federal Reserve's decision to reduce interest rates in September. According to the CME FedWatch Tool, there is a 51.5% probability of a 25-basis-point (bps) rate reduction and a 48.5% probability of a 50-bps cut.
Analysts at JPMorgan noted that a strong CPI reading and robust sales could lead to a swift revaluation of bonds, indicating a 25-bps reduction. This could lead to a more substantial rate cut of 50 bps in September, resulting in stronger Treasury yields and the US dollar.
However, lower CPI and a slowdown in sales may raise concerns about a potential recession in the market. The latter scenario will likely push the euro (EUR) higher. However, the data shows that despite slowing inflation, its rate is still higher than the Fed's target.
Thus, market expectations for rate cuts of 100 bps by the year's end are not justified. More data should indicate slowing inflation so that the US central bank can consider substantial rate cuts.
EUR/USD continues to move bullish during Asian and early European trading hours. The market is awaiting the release of US PPI data at 12:30 p.m. UTC. A reading that exceeds the forecast may keep the euro within the range of 1.09000–1.09500, while a lower-than-expected number may bring the pair down towards 1.10000.
The Canadian Dollar Weakens as Building Permits Plunge
The Canadian dollar (USD/CAD) lost 0.09% against the US dollar (USD) on Monday. USD/CAD traders decided to take profit on their short positions after six straight bearish days.
Yesterday's data revealed that Canadian building permits fell by 13.9% in June—the sharpest monthly drop in six years—substantially lower than the market expected.
The report put additional bearish pressure on the Canadian dollar and helped lift USD/CAD. Furthermore, Friday's employment data showed a net loss of 2,800 jobs in July, with unemployment remaining at a 30-month high of 6.4%.
Unsurprisingly, the probability that the Bank of Canada (BOC) will deliver two rate cuts by November has risen to almost 100%.
However, the market views Canadian monetary policy as slightly less dovish than the Federal Reserve's (Fed). The US central bank is expected to deliver roughly 65 basis points (bps) worth of rate cuts over the same period.
These expectations will be tested today and Wednesday, when the US releases its latest inflation figures. Thus, the market will probably be extremely volatile in the next 48 hours.
Fundamentally, USD/CAD may continue to decline in the medium term: the market has already priced in slowing US inflation, while crude oil prices have risen sharply, supporting CAD.
USD/CAD was down slightly during the Asian and early European trading sessions. Today, the main event is the publication of the US Producer Price Index (PPI) report at 12:30 p.m. UTC. The market expects a 0.2% rise in monthly core PPI and a 2.7% annual increase.
Higher-than-expected figures will likely cause an upward correction in USD/CAD, possibly towards 1.37800.
Conversely, lower-than-expected inflation figures will put additional bearish pressure on the pair, probably pushing it towards 1.37100.