- Gold prices rose after Trump canceled a planned attack on Iran.
- Trump announced that the US and Iran had finally reached a deal to end the war.
- Traders are placing a 58% likelihood of a Fed rate hike in December.
Gold remained elevated on Tuesday as the opportunity cost of holding the precious metal fell after news of a US-Iran peace deal. After the announcement over the weekend, traders slashed bets for a December Fed rate hike. At the same time, market participants are awaiting the FOMC policy meeting to assess policymakers’ remarks.
The rally in gold began on Thursday last week, when Trump canceled a planned attack on Iran. Earlier in the week, tensions had escalated despite ongoing talks. The calling off of strikes showed both sides were giving time for negotiations. As a result, hopes for a deal sent the dollar and oil prices lower.
A weak dollar makes gold cheaper for foreign buyers, increasing demand. At the same time, the decline in oil prices eases inflation concerns. This means less pressure on central banks to hike interest rates. Consequently, the opportunity cost of holding gold reduces, and it climbs.
Spot gold (Source: Bloomberg)
On Saturday, Trump announced that the US and Iran had finally reached a deal to end the war. Therefore, Iran was ready to reopen the Strait of Hormuz. Meanwhile, the US was committed to ending the blockade of Iranian ports.
Still, the two nations have only signed a memorandum of understanding. Markets are cautiously awaiting the official signing ceremony, scheduled for Friday. Some experts remain wary, as anything could happen before this ceremony.
However, if all goes well, traffic through the Strait of Hormuz will increase. As a result, oil supply will rebound, loosening the market and sending prices lower. This would ease the burden of high living costs in many countries.
The news of a deal led to a sharp repricing of rate hike expectations. Initially, escalating tensions and a robust jobs report led traders to assign a 70% chance of a December hike. This dropped to 58% after news of a peace deal.
Later on Wednesday, the Fed will hold its policy meeting. Policymakers might remain cautious about developments in the Middle East. Therefore, they might prefer to keep interest rates on hold as the future unfolds. A drop in oil will definitely bring down inflation, which could allow the central bank to later resume its rate cuts, boosting gold.
