Escalating Middle East Tensions Increase Gold's Safe-Haven Appeal
The gold (XAU) price was mainly flat on Friday as investors focused on the upcoming US Federal Reserve policy meeting on 31 January, seeking further clarity on the trajectory of interest rates.
'We are seeing the gold market consolidating at the moment as the expectations of rate declines aren't quite as soon as the market would like,' mentions David Meger, a director of metals trading at High Ridge Futures. 'But underlying theme or the idea that interest rates will come down in 2024 continues to underpin and support the gold market,' he added. The US Personal Consumption Expenditure (PCE) Price Index rose in December, marking the third consecutive month when the yearly inflation rise was under 3%. Also, Thursday's Gross Domestic Product report indicated that the US economy's growth in Q4 surpassed expectations. Thus, slowing inflation together with a healthy economy might give the Fed room to begin cutting interest rates soon.
In the physical market, gold premiums in China rose this week, buoyed by improved sentiment following additional stimulus measures ahead of the Lunar New Year festivities. Traders are now speculating on six rate reductions of 25 basis points in the US this year, an increase from the five rate cuts projected a week earlier. Thus, expectations of reduced interest rates diminish the opportunity cost of holding bullion, putting additional bullish pressure on gold.
Today, XAU/USD surged as escalating conflicts in the Middle East made safe-haven XAU/USD more appealing to investors. Market participants are now cautious due to increased geopolitical tensions following a drone strike on US forces in northeastern Jordan. 'Spot gold may retest resistance at 2,028 USD per ounce. A break below could open the way towards the 2,033–2,038 USD range,' said Reuters analyst Wang Tao.
The Euro Is Slowly Declining as March Rate Cut in the US Becomes Less Likely
The euro (EUR) faced volatility in Friday's trading session but managed to gain 0.6%.
Mixed US data released on Friday didn't give markets clarity on the potential path of the Federal Reserve's (Fed) monetary policy. Although the Personal Consumption Expenditure (PCE) Price Index aligned with expectations, the data showed a surprising increase in personal spending. Furthermore, pending home sales increased more than expected, diminishing hopes for an interest rate cut from the Fed in March, supporting the US dollar. Currently, the market is pricing in a roughly 49% chance of a 25 basis point rate cut in March.
Meanwhile, traders' expectations for the first interest cut in the eurozone have been shifted towards April. Fundamentally, the Fed and the European Central Bank (ECB) are expected to follow a similar path and begin easing monetary policies at approximately the same time. However, traders will likely favor the US dollar over the euro because the US economy is growing stronger than the E.U.
EUR/USD was falling slightly during the Asian and early European trading sessions as mounting geopolitical tensions in the Middle East triggered safe-haven flows into the US dollar. Today, the macroeconomic calendar is uneventful. Furthermore, traders abstain from placing large orders ahead of Wednesday's Fed policy rate decision. As a result, EUR/USD may experience very low volatility today in the absence of any new developments on the geopolitical front.
GBP/USD May Finally Break Out of Its Tight Range This Week
The British pound (GBP) was essentially unchanged on Friday, even though the release of the US economic data caused above-normal volatility.
GBP/USD has been trading sideways for six days as traders reassess their interest rate expectations. The exact timing of when the Federal Reserve (Fed) and the Bank of England (BOE) will begin cutting interest rates is unclear. However, both central banks will hold policy meetings this week, giving investors more clarity on their interest rate stance. Thus, GBP/USD might finally break out of the tight 1.26400–1.27700 range on Wednesday or Thursday.
Fundamentally, investors expect the BOE to be more hawkish than the Fed because the U.K. has been less successful in fighting inflation. However, investors may be overly optimistic about the Fed's willingness to start easing its monetary policy. The US economy remains robust, and a premature rate reduction might spur a rise in consumer prices. Therefore, GBP/USD bulls should be cautious this week, as any hawkish comments from the Fed might trigger a large sell-off in the pair.
GBP/USD was rising slightly during the Asian and early European trading sessions. Today, the formal macroeconomic calendar is light, so volatility will likely remain low if there are no developments in the Middle East. The short-term technical bias remains bearish as the pound remains below an important intraday level of 1.27300.