Gold Slumps Over 4% As US Yields Surge On Middle East Escalation

Gold (XAU/USD) drops more than 4% on Tuesday as high US Treasury yields weighed on the yellow metal, which usually works as a hedge amid global geopolitical uncertainty and conflicts. The escalation of hostilities between the US, Israel and Iran pushed US debt premiums higher, a tailwind for the US Dollar. At the time of writing, XAU/USD trades at $5,104 after reaching a daily low of $4,997 earlier in the day.

Risk aversion sparked by Middle East conflict fuels inflation fears

Sentiment remains sour as the conflict enters its fourth day, and the rise of Oil prices stoked inflation fears. The US Dollar Index (DXY), which measures the buck’s performance against six currencies, is rising nearly 0.70% to 99.21.

Developments in the Middle East involved explosions in Tehran and Beirut. Threats of the Iranian Revolutionary Guard to keep the Strait of Hormuz closed keep WTI prices underpinned, up so far 6.74% in the day at $75.80 per barrel.

Given the geopolitical backdrop, investors seem less confident that the Federal Reserve (Fed) will reduce borrowing costs during the year, as depicted by high US Treasury yields. The US 10-year Treasury note is yielding 4.059%, up nearly three basis points, a headwind for bullion.

Investors pricing in a less dovish Fed

New York Fed President John Williams crossed the wires and said that policy is “well positioned,” and that “if inflation follows the path I expect, further reductions in the federal funds rate will eventually be warranted.”

Kansas City Fed President Jeffrey Schmid was hawkish, saying that inflation “is too hot,” and that the Fed needs to get inflation down to 2%. Recently, Minneapolis Fed President Neel Kashkari said that “inflation is too high,” and that the “strength of the economy suggests a higher neutral rate.”

Money markets had priced in 44 basis points of Fed easingby year-end, according to Prime Market Terminal data.

Source: Prime Market Terminal

This week, the US economic docket will feature the release of the latest Nonfarm Payrolls report on Friday, the ISM Services PMI on Wednesday and jobless claims on Thursday. Nevertheless, heightened geopolitical tensions pushed macroeconomic data to the backseat.

XAU/USD technical outlook: Gold remains bullish, despite testing $5,000

Gold’s technical picture supports further upside after briefly testing the $5,000 mark. The Relative Strength Index (RSI), although edging lower, remains in bullish territory, an indication that buyers have the upper hand. However, in the short term, XAU/USD might consolidate above/below $5,100, awaiting a fresh catalyst.

If XAU/USD rises past $5,100, the first resistance would be $5,200, followed by the February 24 high at $5,249, ahead of $5,300. Overhead lies the March 3 high at $5,379, ahead of $5,419.

Conversely, if Gold drops below $5,000, the first support would be $4,950, followed by the February 17 cycle low of $4,841. On further weakness, the next stop would be the 50-day SMA at $4,810.