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Gold Remains Elevated on Middle East Tensions; Euro Slumps on Rising US Dollar

Published 04/17/2024, 04:33 AM
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Gold Remains Elevated on Worries About Tensions in the Middle East

The gold (XAU) price moved within $2,364–$2,397 on Tuesday but finished the day essentially unchanged.

The precious metals market is counterbalancing between safe-haven demand and rising expectations of fewer US rate cuts this year. On the one hand, ongoing tensions in the Middle East and the uncontrollable expansion of the US national debt increase the metal's appeal as investors rush to buy safe-haven assets. On the other hand, strong US macroeconomic statistics make it more likely that the Federal Reserve (Fed) will keep its base rate higher for longer.

"The market is in pause mode, waiting for the other shoe to drop on this Israeli-Iran confrontation. You will see another rally in gold if the situation escalates," said Jim Wyckoff, senior analyst at Kitco Metals.

He further added,

"If the Middle East conflict de-escalates, market focus will turn to the Fed. It has become apparent that the Fed is not going to be able to cut rates soon, which is a bearish element for gold and silver markets".

Deutsche Bank now forecasts gold prices to reach $2,400 by the end of the year and $2,600 in December 2025.

XAU/USD was essentially unchanged during the Asian and early European trading sessions. The economic calendar is rather uneventful today, so gold will likely follow technical trends. However, the upcoming speeches by Fed officials at 9:30 p.m. and 10:30 p.m. UTC might trigger some volatility. Yesterday, the Fed's Chairman, Jerome Powell, did not provide details on when the regulator may cut interest rates, saying that monetary policy needs to be restrictive for longer.

"Spot gold may test support at $2,367 per ounce, a break below which could be followed by a drop into a range of $2,345–$2,354," said Reuters analyst Wang Tao.

The ECB May Postpone a Rate Hike if Inflation Remains Sticky

The euro (EUR) lost 0.05% on Tuesday, declining for the fifth consecutive trading session as the US Dollar Index (DXY) rose.

Jerome Powell, Chairman of the Federal Reserve (Fed), indicated that the US central bank may need to maintain higher interest rates for longer due to persistent inflation. Thus, stronger-than-expected US data and safe-haven flows induced by geopolitical uncertainty supported the US dollar. High inflation, robust retail sales, and a tight labor market make it less likely that the Fed will begin cutting interest rates soon. According to the CME FedWatch Tool, the probability of a 25-basis-point rate cut in June is now only 15%, while the chance of a reduction in July is less than 37%.

Meanwhile, investors continue to expect the European Central Bank (ECB) to cut its base rate in June. However, some ECB officials have recently started to signal a more hawkish stance. Francois Villeroy de Galhau, an ECB policymaker, stated that the regulator might adapt the pace of rate cuts if the fallout from Middle East tensions has a lasting impact on energy prices and inflation.

EUR/USD was essentially unchanged in the Asian and early European trading sessions. An important event for euro traders will be the eurozone's final Consumer Price Index (CPI) report for March, due at 9:00 a.m. UTC. If the figures are higher than expected, the ECB may be less inclined to ease its policy in June. Additionally, some ECB officials will deliver speeches later today. If they sound more hawkish or less dovish than previously, EUR/USD may potentially correct upwards.

USD/JPY Hits a 34-Year High on Jerome Powell's Hawkish Remarks

The Japanese yen (JPY) lost 0.28% in a rather volatile trading session on Tuesday.

Initially, USD/JPY dropped below the critical 154.00 level as traders feared a possible intervention by Japanese authorities after Shun'ichi Suzuki, the Japanese finance minister, stated he was 'watching closely' the Forex market and would take a 'thorough response as needed'. Jerome Powell, the Federal Reserve (Fed) Chair, delivered a hawkish message on Tuesday, boosting the US dollar. Powell noted the lack of further progress in tackling inflation and mentioned that interest rates may need to remain higher for longer. Thus, investors had to reassess their expectations of interest rate cuts by the Fed.

At the same time, the market continues to expect the Bank of Japan (BOJ) to deliver roughly 25 basis points (bps) of rate hikes in 2024. However, it is unknown when and to what extent the Japanese authorities might intervene to prevent rapid depreciation of the JPY.

"Intervention can only work today to slow or manage the pace of depreciation but cannot turn a trend. And it's actually very costly. The big challenge for a number of these Asian currencies is that as long as US bond yields keep grinding higher, you're not going to get a lot of success because you're fighting a wider yield spread," said Kenneth Broux, head of corporate research, FX, and rates at Societe Generale

USD/JPY was unchanged in the Asian and early European trading sessions. The economic calendar is rather uneventful today, so USD/JPY will likely follow established technical trends. However, the upcoming speeches by Fed officials at 9:30 p.m. and 10:30 p.m. UTC might trigger some volatility. The main event for the pair will arrive on Friday when the Statistics Bureau of Japan publishes its national core Consumer Price Index (CPI). Higher-than-expected figures will almost certainly trigger a strong downward correction in USD/JPY, potentially below the important 153.000 level. Conversely, lower-than-expected results will likely push USD/JPY higher, increasing the risk of interventions by the Japanese authorities.

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