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- Gold prices extend losses as Trump pushes Israel and Iran to adhere to the ceasefire agreement.
- Fed Chair Powell reiterates that the US economy is in a “solid” state as he begins his two-day semi-annual testimony to Congress.
- XAU/USD is heading toward $3,300 as risk-on sentiment prevails following the ceasefire agreement.
Gold prices fell on Tuesday as investors fled from safe-haven assets and continued to monitor remarks from Jerome Powell, Chair of the Federal Reserve (Fed).
As Fed Powell began his two-day semi-annual testimony before Congress, his prepared remarks stated that “the Fed’s obligation is to prevent a one-time increase in price-level from becoming an ongoing inflation problem by keeping inflation expectations well-anchored.”
Powell reiterated that the US economy remains “solid”, diminishing hopes of a July rate cut and placing additional pressure on Gold prices.
With prices now moving closer toward $3,300, Gold remains sensitive to changes in geopolitics and rate expectations. Further comments from Powell are expected to remain key drivers of price action ahead of Friday’s inflation data.
Daily Digest market movers: Israel-Iran ceasefire, Fed expectations drive Gold prices
- Risk appetite was lifted on Tuesday after United States (US) President Donald Trump confirmed a ceasefire between Israel and Iran, posting on Truth Social: “THE CEASEFIRE IS NOW IN EFFECT. PLEASE DO NOT VIOLATE IT!”
- In response to prospects of a de-escalation in the Middle East tensions, XAU/USD fell and has continued to decline throughout the day.
- Despite the apparent breakthrough, Israeli Defense Minister Israel Katz ordered retaliatory strikes after claiming Iran violated the agreement hours after both nations agreed to the ceasefire, allegations that Tehran denies.
- US President Donald Trump announced the initial ceasefire between Israel and Iran on Monday evening during an address at Capitol Hill, stating that “Stability in the Middle East is essential for global peace.”
- The announcement followed Iranian missile strikes on US bases in Qatar, which were intercepted without casualties.
- The ceasefire has pressured Gold and Crude Oil prices as traders unwind risk hedges tied to potential disruptions in the Strait of Hormuz, a critical chokepoint for roughly 20% of global Oil supply.
- The reduced threat of supply disruption would help lower inflation expectations, a key theme for the Fed, which is facing pressure from Trump to cut interest rates.
- Although markets are pricing in two rate cuts this year, analysts are expecting the Fed to begin easing in September. Any changes to this narrative and these expectations could contribute to Gold’s next move.
- On Monday, Fed Governor Michelle Bowman said she was “open” to rate cuts if inflation continues to ease.
- The remarks echo similar comments from Fed Governor Christopher Waller last Friday. Waller noted in a CNBC interview that “we could do this as early as July.” According to the CME FedWatch Tool, the probability of a rate cut next month is at around 23%, up from 16% a week ago.
- Friday’s release of the Core Personal Consumption Expenditures Price Index (PCE), the Fed’s preferred inflation gauge, will also be key for market direction.
Gold technical analysis: XAU/USD slips toward $3,300
XAU/USD has fallen below the 50-day Simple Moving Average (SMA) on Tuesday, which is now providing resistance at $3,322. With prices currently testing the $3,300 psychological support level, the 38.2% Fibonacci retracement of the April rally rests at $3,292, followed by the 50% retracement near $3,228.
A rebound above the 50-day SMA could see the 20-day SMA around $3,353 coming into play, opening the door for the 23.6% Fibonacci level at $3,372.
A break above $3,400 is needed to revive bullish momentum. The Relative Strength Index (RSI) has fallen to 46, indicating weakening upside pressure.
Risk sentiment FAQs
In the world of financial jargon the two widely used terms “risk-on” and “risk off” refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.
Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.
The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.
The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.
