- The US and Iran failed to hold planned negotiations in Pakistan over the weekend.
- Trump rejected Iran’s new proposal to end the war.
- Experts believe the Fed will keep interest rates unchanged.
Gold prices declined by 2% on Tuesday as Trump dashed hopes for an end to the Middle East war by rejecting Iran’s proposal. Tensions have remained high since last week, boosting the dollar and hurting gold amid rising safe-haven demand. Meanwhile, traders are gearing up for the FOMC meeting and for clues on future policy moves.
Gold prices (Source: Trading Economics)
Last week, gold prices fell amid reports of ships being captured in the Indian Ocean and the Strait of Hormuz, signalling rising tensions. Moreover, the US and Iran failed to hold planned negotiations in Pakistan over the weekend. Trump said the Iranian leaders were still confused. However, optimism followed Iran’s new proposal on Monday. Still, Trump rejected the proposal.
“It has revived pessimism about the peace process in the Middle East. The Trump administration rejected Iran’s most recent offer, and so the strait remains closed,” said Peter Grant, vice president and senior metals strategist at Zaner Metals.
“That has driven oil prices up and revived concerns about inflation heading into the FOMC meeting this week… pushing gold to four-week lows.”
Therefore, the Strait of Hormuz remains closed, and oil has jumped again, up by 3% on Tuesday. The increase in oil prices has intensified inflation concerns. As inflation spikes, central banks are forced to consider hiking interest rates.
Oil rose, especially after the United Arab Emirates said it would exit OPEC and OPEC+ on Friday. The move comes amid ongoing disruptions to oil supply that have hurt the country’s economy. High borrowing costs are bearish for gold, as traders prefer to allocate their money to yielding assets like the dollar.
Gold also pulled back last week amid a strong dollar, which made the precious metal pricier for foreign buyers. The dollar surged amid war-related uncertainty and solid US consumer spending data. This report and the strong labor market will likely keep the Fed on a cautious policy path.
This week, all eyes will be on the FOMC policy meeting. Experts believe the Fed will keep interest rates unchanged. Moreover, policymakers might hint at delaying rate cuts. Their view on the war and inflation will significantly impact gold prices.
