Gold price recovers as escalating Middle East tensions improve demand for safe-haven assets

• Gold price has extended its recovery to near $2,030 as the US Dollar turns sideways.
• A pullback move in the Gold price is less convincing as traders have pared bets for  a Fed rate cut in March.
• Upbeat US Retail Sales numbers signal upside risks to US inflation.

Gold price (XAU/USD) rises further on Friday’s European session as the appeal for safe-haven assets improves due to the deepening Middle East conflict. Adding to the war in Gaza, tensions between Houthi rebels and the United States military are increasing in the key commercial shipping route crossing the Red Sea. Moreover, Pakistan carried out military strikes in Iran on Thursday following a similar attack by Iran in its territory.  

In this context, the precious metal has recovered significantly, but the outlook in the near term has not turned bullish as further upside looks capped by diminishing bets supporting an interest-rate cut from the Federal Reserve (Fed.)

The outlook for inflation in the United States remains uncertain. Price growth is gradually declining, but recent data suggests that the economy is strong, particularly due to robust household spending.  This adds to inflation pressures and makes it more likely that the Fed will maintain a restrictive monetary policy stance for a longer period. 

The Fed is expected to keep interest rates unchanged in the range of 5.25%-5.50% for the fourth consecutive time at the monetary policy meeting on January 31. Market participants will focus on the commentary about how the Fed will fit the expected three interest rate cuts in the remaining seven policy meetings of 2024. 

Daily digest market movers: Gold price recovers further as US Dollar remains subdued

• Gold price extends recovery to near $2,030 as the US Dollar has turned sideways after a strong upside move. 
• The recovery in the Gold price is also backed by deepening geopolitical tensions, which have increased flows towards safe-haven assets.
• The appeal for safe-haven assets is upbeat as the Iran military group is expected to retaliate for airstrikes launched by the US military targeting Houthis in Yemen.
• In spite of supportive economic fundamentals, the Gold price is expected to end the week on a bearish note, weighed by lower Fed rate cuts bets due to a stable labor market, robust consumer spending, and a sticky inflation outlook. 
• US Retail Sales were robust in December due to a sharp increase in demand for motor vehicles and online purchases, which set a positive undertone for 2024. An upbeat retail demand has escalated fears for inflation remaining persistent. 
• US Initial Jobless Claims for the week ending January 12 fell significantly lower to 187K against expectations of 203K and the prior reading of 207K. This indicates that labor demand is upbeat despite the Fed maintaining interest rates at high levels.
• Strong economic data strengthens the argument supporting a restrictive interest rate environment.
• On Thursday, Atlanta Federal Reserve Bank President Raphael Bostic supported a reduction in interest rates, but only after the first half of this year as long as inflation declines towards the 2% target.
• Bostic cautioned about premature interest rate cuts as they could decelerate the progress in the achievement of price stability. Also, early rate cuts could bring an uptick in retail demand and spoil entire efforts made to tame price pressures. Bostic endorsed two interest rate cuts this year, diverging from the Fed’s median projections of three rate cuts.
• The US Dollar Index (DXY) sees a sharp contraction in volatility around 103.40. The USD Index trades slightly below its monthly high of 103.70, but it is expected to extend its recent recovery as investors scale back interest rate cut bets for March.
• As per the CME Group Fedwatch tool, traders see a 53% chance for an interest rate cut by 25 bps in March, sharply down from the above 70% seen last week.

Technical Analysis: Gold price recovers from 50-day EMA

Gold price jumped to near $2,030 on Friday. The precious metal recovered strongly after finding buying interest near the psychological support of $2,000. The yellow metal rebounded after taking support from the 50-day Exponential Moving Average (EMA), which trades around $2,017. However, the 20-day EMA near $2,035 is still acting as a barrier for the Gold price bulls. The 14-period Relative Strength Index (RSI) rebounded after testing territory near 40.00.

More upside could appear if Gold manages to stabilize above the $2,030 resistance, while the downside move could gain traction on a breakdown below the psychological supportof $2,000.