Gold weakened sharply overnight as markets moved past the initial geopolitical shock of the widening Middle East conflict and began repricing the Federal Reserve outlook. The early safe-haven surge faded as investors reassessed the broader implications of the conflict, particularly the inflationary impact of surging oil prices.
The threat to the Strait of Hormuz has driven crude prices higher, but the implications for Gold are more complex than a simple risk-off rally. While geopolitical tensions typically support bullion, the resulting spike in energy costs also raises the prospect that global inflation could remain elevated for longer than previously expected.
Higher oil prices act as a direct challenge to the Fed’s disinflation narrative. Energy costs effectively operate as a tax on economic activity while simultaneously pushing headline inflation higher. As a result, traders have begun pushing back expectations for the next Fed rate cut from June or July toward September.
That shift implies a longer period of policy restraint as the Fed waits to assess how persistent the energy shock may prove. If inflation expectations begin to rise again, policymakers are likely to remain cautious, preferring to keep rates higher for longer until the second-round effects of oil prices become clearer.
In that environment, Gold faces increasing competition from Dollar. During periods of stress, investors often prioritize liquidity, and the greenback tends to benefit more directly from global risk aversion. With Dollar Index moving back toward the 100 level, Gold is facing renewed pressure from its inverse correlation with the currency.
Technically, however, the current development remains consistent with our view. Price actions from 5598.38 record high are seen as a corrective pattern, with the first leg completed at 4403.34.
The current break of 5119.18 resistance turned support argues that the second leg from 4403.34 might have already completed at 5419.02 already. Risk will stay on the downside for 4844.91 support first. Firm break there should solidify this case and bring deeper decline back towards 4403.34.
However, break of 5419.02 will extend the rise with 4403.34 with on more upleg, and possibly with a retest of 5598.38 before completion.
