Category: Forex News, News
Persistent USD strength weighs on XAU/USD as US-Iran war widens
Gold (XAU/USD) came under heavy bearish pressure and registered weekly losses even after opening with a bullish gap on news of the United States (US) and Israel carrying out a joint attack against Iran on February 28. In the near term, investors will assess inflation data from the US and pay close attention to fresh developments surrounding the Middle East crisis.
Gold fails to benefit from escalating geopolitical tensions
Gold touched its highest level since January 30, above $5,400, at the start of the week, but reversed its direction as the persistent US Dollar (USD) strength didn’t allow XAU/USD to capitalize on safe-haven flows. Still, the yellow metal managed to close in positive territory on Monday.
On February 28, the US and Israel launched a coordinated attack on Iran, killing Iranian Supreme Leader Ayatollah Ali Khamenei and up to 40 top Iranian officials. In response, Iran targeted US assets across the Gulf and Hezbollah also announced that it launched strikes on Israeli missile defense sites.
While markets remained risk-averse, with the chaos in the Middle East spreading, surging Oil prices revived fears over inflation rising again in the US. The barrel of West Texas Intermediate (WTI) rose more than 25% on a weekly basis as the naval activity in the Strait of Hormuz came to a halt, and touched its highest level since April 2024, above $87. Additionally, macroeconomic data releases from the US came in better than expected.
In turn, market participants reassessed the Federal Reserve (Fed) policy outlook and started to price in a further delay to the continuation of monetary policy easing. The USD gathered strength as a result and caused XAU/USD to turn south. The US Dollar Index, which tracks the USD’s performance against a basket of six major currencies, advanced to its highest level since November, above 99.00. The CME Group FedWatch Tool showed that the probability of three consecutive policy holds, in March, April and June, climbed to about 70% early Friday from nearly 40% before the US-Iran war started.
The Institute for Supply Management (ISM) reported on Monday that the Manufacturing Purchasing Managers’ Index (PMI) remained in the expansion territory above 50 in February, while the inflation component of the survey, the Prices Paid Index, jumped to 70.5 from 59 in January. On Wednesday, February’s ISM Services PMI improved to 56.1, from 53.8 in January, and Automatic Data Processing (ADP) announced that Employment Change for February was 63K, surpassing the market expectation of 50K.
Scotiabank strategists Shaun Osborne and Eric Theoret note that a 25 basis points Fed rate cut is not fully priced until September, “reflecting a material softening of expectations for easing as a result of both stronger data and the US/Iran conflict.”
“The latest ISMs have been impressive, with both manufacturing and services showing a material improvement in sentiment and suggest a material re-acceleration in US economic activity,” they add.
The US Bureau of Labor Statistics reported on Friday that Nonfarm Payrolls declined by 92K in February, missing the market expectation for an increase of 59K by a wide margin. Moreover, the Unemployment Rate edged higher to 4.4% from 4.3%. As the CME Group FedWatch Tool’s probability of three consecutive Fed policy holds declined to 60% after this data, Gold managed to keep its footing heading into the weekend.
Gold traders will remain focused on US-Iran war
The US economic calendar will feature the Consumer Price Index (CPI) data for February on Wednesday and the Personal Consumption Expenditures (PCE) Price Index data for January on Friday. These releases could trigger a market reaction, but it’s likely to remain short-lived. A stronger-than-forecast increase in the monthly core CPI and core PCE Price Index could support the USD, while soft prints could have the opposite effect on the currency’s performance and help XAU/USD rebound.
Investors will pay close attention to the developments in the Middle East and changes in crude Oil prices.
US Interior Secretary Doug Burgum said that the Trump administration is weighing a range of options for addressing the spike in Oil and gasoline prices amid the war in Iran, Bloomberg reported on Friday. In case there is a sharp correction in prices, be it via additional security measures in the Strait of Hormuz to reinstate the naval activity or an intervention by the Trump administration, the impact on inflation could remain limited. In this scenario, investors could reassess the probability of a Fed rate cut in June, opening the door to a reactive selloff in the USD and driving XAU/USD higher.
Conversely, a deepening conflict in the Middle East and a leg higher in Oil prices could be beneficial for the USD and cause XAU/USD to stay on the back foot.
Still, it might be risky to bet against Gold, given the precious metal’s safe-haven appeal. Although markets seem to be focusing more on energy prices and possible changes in the Fed’s policy outlook, the narrative could shift toward a stagflation risk in the US if markets grow worried about a prolonged conflict. In this case, Gold could reclaim the title of the preferred safe-haven asset from the USD.
Gold technical analysis: Bullish momentum fades away
The Relative Strength Index (RSI) on the daily chart declines toward 50 and Gold fluctuates at around the 20-day Simple Moving Average (SMA), reflecting a loss of bullish momentum in the near term.
The Fibonacci 23.6% retracement of the November-February uptrend and the 20-day SMA form a pivot area at $5,090-$5,100. In case Gold stays below this region and confirms it as resistance, technical sellers could remain interested. On the downside, $4,875-$4,865 (Fibonacci 38.2% retracement, 50-day SMA) could be seen as the next important support area before $4,695-$4,700, where the ascending trend line and the Fibonacci 50% retracement level meet.
Looking north, an interim resistance level seems to have formed at $5,200 (static level) before $5,400 (static level) round level and $5,598 (all-time high).
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it.
Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
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