- Gold falls from new highs near $2,430 as investors do not see tensions in the Middle East escalating.
- US bond yields soar as the Fed appears to start the rate cut cycle starting in September.
- The US dollar strengthens after good retail sales data in the United States.
The price of Gold (XAU/USD) struggles to establish itself near $2,350 at the beginning of the American session, after registering heavy losses on Friday. The precious metal loses its shine in the very short term, as investors hope that geopolitical tensions do not escalate further. The president of the United States, Joe Biden, stated that his country will not support Israel's counterattack on Iran.
The retreat of the Federal Reserve (Fed) rate cut bets for the June and July meetings, along with reduced fears of a new escalation of tensions between Iran and Israel, have put some pressure on Gold. Fed officials support maintaining restrictive interest rates before becoming convinced that inflation will return to the required rate of 2%
Meanwhile, better-than-expected March monthly retail sales data has boosted bond yields and the US dollar. The US Census Bureau reported that retail sales grew 0.7%, more than double what was expected (0.3%). In February, retail sales rose 0.9%, a figure revised upward from 0.6%. Strong spending by American households remains a major catalyst for rising inflation, allowing companies to charge consumers more.
The 10-year US Treasury yield rebounds to 4.61%. The increase in bond yields weighs on the price of Gold, as it increases the opportunity cost of maintaining an investment in it. The US Dollar Index (DXY), which measures the value of the dollar against six major currencies, marks a new five-month high at 106.16.
Daily summary of market movements: Gold price falls as investors see tensions in the Middle East stagnating
- The price of Gold is consolidating after retreating from new all-time highs near $2,430, as investors see Iran's airstrike against the Israeli state only as retaliation for the attack on its embassy in Syria, near Damascus. Tensions between Iran and Israel are not expected to escalate, as Tehran has declared that “the matter is considered closed,” but if the Israeli regime makes another mistake, Iran's response will be considerably more severe, according to the Wall. Street Journal.
- The US statement that it will not support Israel's counterattack has increased investor confidence that tensions in the Middle East will not escalate further. Over the weekend, Iran launched hundreds of drones and missiles aimed at Israel.
- Meanwhile, uncertainty over the Federal Reserve's (Fed) pivot toward rate cuts has weighed heavily on Gold. Financial markets have carried forward their expectations of Fed rate cuts to the September meeting, as the report The US Consumer Price Index (CPI) was more bullish than expected in March.
- San Francisco Fed President Mary Daly declared Friday that there is no urgency to reduce interest rates. Daly added that there is still work to be done to ensure inflation is on track to return to the desired rate of 2%. She also insisted on keeping interest rates restrictive as long as inflation is necessary to return to the 2% target.
- For her part, the president of the Boston Fed, Susan Collins, stated that she expects demand to begin to slow down and serve as support to reduce inflation at the end of the year. Collins said she forecast two rate cuts in the latest dot chart, in which most Fed members projected the central bank would cut interest rates three times by the end of the year.
Technical analysis: Gold falls from new highs near $2,430
The price of Gold is correcting from new all-time highs formed around $2,430. The precious metal is facing pressure as momentum oscillators are overbought. The 14-period Relative Strength Index (RSI) falls slightly after reaching highs around 85.00. Short-term demand is intact as the RSI remains in the bullish range of 60.00-80.00. However, Momentum oscillators are cooling after becoming extremely overbought.
On the downside, the April 5 low near $2,268 and the March 21 high at $2,223 will be the main support zones for the price of Gold.
Inflation FAQ
What is Inflation?
Inflation measures the rise in prices of a representative basket of goods and services. General inflation is usually expressed as a month-on-month and year-on-year percentage change. Core inflation excludes more volatile items, such as food and fuel, which can fluctuate due to geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the target level of central banks, which are mandated to keep inflation at a manageable level, typically around 2%.
What is the Consumer Price Index (CPI)?
The Consumer Price Index (CPI) measures the variation in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage of inter-monthly and inter-annual variation. Core CPI is the target of central banks as it excludes food and fuel volatility. When the underlying CPI exceeds 2%, interest rates usually rise, and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually translates into a stronger currency. The opposite occurs when inflation falls.
What is the impact of inflation on currency exchange?
Although it may seem counterintuitive, high inflation in a country drives up the value of its currency and vice versa in the case of lower inflation. This is because the central bank will typically raise interest rates to combat higher inflation, attracting more global capital inflows from investors looking for a lucrative place to park their money.
How does inflation influence the price of Gold?
Gold was once the go-to asset for investors during times of high inflation because it preserved its value, and while investors often continue to purchase gold for its safe haven properties during times of extreme market turmoil, this is not the case. most of the time. This is because when inflation is high, central banks raise interest rates to combat it.
Higher interest rates are negative for Gold because they increase the opportunity cost of holding Gold versus an interest-bearing asset or placing money in a cash deposit account. On the contrary, lower inflation tends to be positive for Gold, as it reduces interest rates, making the shiny metal a more viable investment alternative.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
