Gold Rallies on Safe-Haven Demand but Fails to Hold Above 2,400
On Friday, the gold (XAU) price surged above 2,400 but lost most of the gains in the American session and declined by 0.39%.
As tensions in the Middle East intensified, investors fled to safe-haven assets—gold and the US dollar.
"What's really telling about the strength of gold is that the US Dollar Index and Treasury yields are climbing, yet gold continues to rally strongly—that's very indicative of strong safe-haven demand," said Jim Wyckoff, the senior analyst at Kitco Metals.
Iran attacked Israel over the weekend, but it isn't yet clear whether Israel will retaliate. Either way, traders should pay attention to developments surrounding the Middle East conflict, given that the US monetary policy outlook now seems to have less impact on XAU/USD.
Indeed, due to strong US macroeconomic data, investors have scaled back their rate cut expectations and are now pricing in only a 22% chance of a 25-basis-point rate cut by the Federal Reserve (Fed) in June. Previously, this would have been perceived as a negative factor for gold. However, the combination of geopolitical risks and central banks' plans to diversify their reserves is now pushing the gold price higher.
"It will be somewhat healthy to see a correction in the bull market, but the trend will continue to be positive," said Chris Gaffney, the president of world markets at EverBank.
XAU/USD was essentially flat during the Asian and early European trading sessions. Today, the economic calendar features some important data releases from the US, but developments from the Middle East will likely overshadow any reports. Still, the US Retail Sales and the Empire State Manufacturing Index will be released at 12:30 p.m. UTC. Better-than-expected figures will decrease the chances that the Fed will ease its policy in July, possibly putting downward pressure on the gold price. Otherwise, the data might trigger another bullish impulse in XAU/USD. However, the pair is technically overbought.
Wang Tao at analyst Reuters said,
"Spot gold may retest support at $2,332 per ounce, a break below which could open the way towards the $2,310–$2,319 range".
Tim Waterer, chief market analyst at KCM Trade said,
"$2,500 is looking more like a viable near to medium-term target while momentum remains on the side of the precious metal, which has been the story so far in 2024".
The Euro had Its Worst Week Since September 2022
Last week, the euro (EUR) experienced its largest weekly percentage decline since late September 2022.
Last week, the euro experienced significant losses against the US dollar and, to a lesser extent, against the British pound. The decline was primarily fuelled by the European Central Bank's (ECB) dovish remarks at the last monetary policy meeting. Additionally, escalating geopolitical tensions in the Middle East further contributed to the euro's fall. The possibility that the ECB will begin easing rates before the Federal Reserve (Fed) negatively impacts EUR/USD. There were signs that the Fed might also lower rates in June, but unexpectedly high US CPI figures and strong labor market data have shifted this outlook. Thus, a more hawkish stance on US interest rates has strengthened the US dollar. Boston Fed President Susan Collins stated on Friday that she expects around 2 rate cuts in 2024, as opposed to the previously expected 3 rate reductions.
Over the weekend, Iran responded to an alleged Israeli strike on its consulate in Syria. The market has remained relatively stable despite these developments, probably because Iran had warned about planning an attack in advance, helping to prevent further escalation. The US dollar strengthened as geopolitical tensions spurred safe-haven demand, exerting downward pressure on EUR/USD.
EUR/USD was essentially unchanged in the Asian and early European trading sessions. Today, traders should pay attention to the US Retail Sales report at 12:30 p.m. UTC. The report will provide insights into the pace of US inflation, potentially influencing investors' interest rate expectations and affecting EUR/USD. If the data exceed expectations, the chances of a rate cut by the Fed in autumn may decrease, possibly leading to a drop in EUR/USD below 1.06300. Conversely, lower-than-expected figures could increase the prospects of an imminent rate cut, reversing EUR/USD's bearish trend and pushing the pair towards 1.07000.
AUD/USD Drops Below 0.65000 as Investors Rush to the US Dollar
The Australian dollar (AUD) plunged by more than 2% on Friday as the US dollar rallied due to risk-off flows as conflict in the Middle East has escalated.
The bullish trend in AUD/USD, which has been in place since October 2023, is now broken. Geopolitical uncertainty has triggered safe-haven demand, and investors have turned away from risk-sensitive currencies, such as the Australian dollar. In addition, the divergence in monetary policies also favors the US dollar. According to the interest rate swap market data, traders expect the Federal Reserve (Fed) to cut its base rate by just 44 basis points (bps) in 2024 but anticipate around 55 bps worth of cuts from the Reserve Bank of Australia (RBA). Still, it's highly improbable that the RBA will decide to reduce the cash rate before the Fed, as inflation in Australia remains above the official target and may increase further due to rising energy costs.
AUD/USD was rising slightly during the Asian and early European session, but the 0.65000 mark continues to act as strong resistance. Today, several economic reports from the US may trigger volatility in AUD/USD. At 12:30 p.m. UTC, the US will publish its regular Retail Sales report and Empire State Manufacturing Index. Better-than-expected results are likely to bring AUD/USD below 0.64500. However, weaker-than-expected figures may push the pair towards 0.65000, but it may be challenging for the pair to hold above this level.