- Risk appetite improved as Middle East tensions subsided.
- The outlook for gold has dimmed with the prospect of higher US rates for longer.
- The US composite PMI fell in April, indicating a decline in business activity.
Gold prices closed nearly flat on Tuesday after falling to a two-week low due to the loss of safe-haven demand. Moreover, investors turned their focus back to US economic data and the outlook for Fed interest rates.
From the start of the week, risk appetite improved as Middle East tensions subsided. As a result, investors returned to risk assets like equities, leading to a decline in safe-haven gold. Tensions in the Middle East eased when Iran said it had no plan to respond to Israel’s last attack. Therefore, although the war in Gaza continues, fears of an escalation have significantly dropped, allowing investors to focus on economic data and the Fed’s rate-cut outlook.
Notably, gold prices have risen recently despite the significant change in the outlook for Fed rate cuts. The stronger-than-expected economic reports from the US have led to a loss of confidence that inflation will reach the Fed’s 2% target soon. Instead, it has become clear that US inflation has stalled well above target. As a result, policymakers have changed their tone and are now more hawkish and cautious about rate cuts.
Traders are now pricing under two cuts in 2024, with the first likely coming in September. However, gold traders ignored this due to the sudden risk of an escalation in the Middle East war. Now that tensions have decreased, the outlook for gold has dimmed with the prospect of higher rates for longer.
US business activity (Source: S&P Global)
Still, on Tuesday, there was some relief in the market when the US released poor Purchasing Managers Index figures. The composite PMI fell in April, indicating a decline in business activity. Although not an inflation report, it is a leading indicator of economic demand, which drives price increases. Therefore, a poor report gives the Fed some confidence regarding its progress in lowering inflation. At the same time, it offers gold traders hope that the central bank will start cutting rates soon.
The poor report also led to a decline in the dollar, which made gold cheaper for overseas buyers. As a result, there was an increase in demand, which helped prices recover as the session ended. Investors will now await more data from the US on GDP and the PCE price index for clues on when the Fed might start cutting rates.
