- The US and Iran exchanged strikes on Tuesday and Wednesday.
- Israel and Iran agreed on a ceasefire deal.
- The US will release its CPI report later today, viewed as the week’s major risk event.
Gold collapsed on Wednesday as strikes between the US and Iran sent oil prices higher. The renewed tensions have escalated inflation concerns, pushing up expectations for Fed rate hikes. Meanwhile, market participants are eagerly awaiting the monthly US consumer inflation report, which will continue to shape the outlook for monetary policy.
Since last Monday, gold has suffered as hopes for an end to the conflict between the US and Iran have dimmed. Tensions in the Middle East continued to simmer, sending oil prices higher. Traders had initially hoped that a peace deal between the US and Iran would see the reopening of the Strait of Hormuz. Such an outcome would have eased supply disruptions, allowing oil prices to drop.
However, this has not been the case. The US and Iran were back to striking at each other on Tuesday, hurting risk appetite. Traditionally, investors see gold as a safe haven in times of uncertainty. However, when rate hike expectations are higher, traders prefer the safety of yielding assets like the dollar. As a result, Bullion suffers.
On the positive side, Trump called on Israel and Iran to end their conflict, and they agreed on a ceasefire. Iran has accused Israel of violating their ceasefire terms with the US in Lebanon. Israel had resumed attacks in the country, leading to a collapse in negotiations between the US and Iran. However, traders remain cautious about the ceasefire.
“Gold is trading muted, with traders skeptical about the durability of the Iran-Israel ceasefire and remaining cautious ahead of this week’s important US inflation data, which will help shape the Fed’s policy outlook,” said Tim Waterer, chief market analyst at KCM Trade.
Spot gold (Source: Bloomberg)
On the economic data front, the US nonfarm payrolls report out on Friday weighed heavily on gold. According to the Bureau of Labor Statistics, 172,000 new jobs were created in May. This figure came in well above the forecast of 85,000. Such a strong labor market will put pressure on the Fed to hike borrowing costs.
After the report, traders increased the likelihood of a December rate hike to 70%. Later on Wednesday, the US will release the CPI report. A hotter-than-expected figure would increase this likelihood further and send gold even lower.
