Gold clings to gains above $5,400 as sustained safe-haven flows counter USD strength
- Gold opens with a bullish gap as escalating Middle East conflict boosts safe-haven assets.
- The intraday move up seems unaffected by a strong pickup in demand for the US Dollar.
- Stagflation fears further underpin the XAU/USD pair and contribute to the positive move.
Gold (XAU/USD) sticks to strong intraday gains through the first half of the European session and currently trades above the $5,400 mark, or its highest level since late January. Investors are rapidly abandoning riskier assets and opting for safe-haven investments amid an intense wave of the global risk-aversion trade.
A dramatic escalation of geopolitical tensions in West Asia over the weekend unsettles global markets. In fact, the US and Israel launched a coordinated military strike on Iran, killing Supreme Leader Ayatollah Ali Khamenei. Adding to this, Iran's Islamic Revolutionary Guard Corps (IRGC) Navy announced the closure of a critical maritime chokepoint – the Strait of Hormuz – and raised the risk of a protracted war in the Middle East. This, in turn, provides a strong boost to the traditional safe-haven Gold at the start of a new week.
Meanwhile, the US Producer Price Index (PPI), released on Friday, revived concerns about still sticky inflation. Furthermore, slowing economic growth creates a scenario where the Federal Reserve (Fed) cannot cut interest rates without reigniting inflation or hold without slowing the economy further. This turns out to be another factor underpinning the non-yielding Gold, though a strong intraday US Dollar (USD) rally to the highest level since January 23 might cap further gains.
Traders this week will confront important US macro releases, scheduled at the beginning of a new month, starting with the ISM Manufacturing PMI later today. This will be followed by the ADP report on private-sector employment and the ISM Services PMI on Wednesday, and the closely-watched Nonfarm Payrolls (NFP) report on Friday. The focus, however, will remain glued to geopolitical developments, which will have a significant impact on the global risk sentiment and play a key role in driving demand for the safe-haven Gold.
Gold seems poised to climb further amid a bullish technical setup
Against the backdrop of last week's breakout above the $5,200 horizontal barrier, the strong move up on Monday favors the XAU/USD bulls. Moreover, the Moving Average Convergence Divergence (MACD) line stands above its signal in positive territory, with the histogram expanding, which supports building bullish momentum after the latest leg higher.
Meanwhile, the Relative Strength Index at 68.88 hovers just below overbought territory, showing firm but not extreme upside pressure. Initial support emerges near $5,260, where the latest consolidation area begins, followed by a deeper floor around $5,210, guarding the prior congestion band. A break below $5,210 would expose $5,180 as the next downside level.
On the topside, immediate resistance is located at the recent spike high around $5,390. A sustained push above $5,390 would open the way for an extension of the uptrend, while a failure to clear this barrier would keep XAU/USD vulnerable to a corrective pullback toward the cited supports.
(The technical analysis of this story was written with the help of an AI tool.)
XAU/USD 4-hour chart
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
Author
Haresh Menghani
FXStreet
Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.
