Geopolitical Tensions and Fed Rate Cut Expectations Shape Forex and Commodities (08.27.2024)

Geopolitical tensions in the Middle East and expectations of Federal Reserve rate cuts have significantly influenced market movements. The dollar index stabilized after a recent dip, supported by safe-haven demand, while the EUR/USD and USD/JPY pairs reflected the broader market sentiment. Gold prices declined despite Fed rate cut expectations, with ongoing Middle East tensions offering some support. GBP/USD pulled back after a strong rally, and silver prices remained near recent highs, driven by Fed policy speculation and safe-haven buying.

Dollar Index Stabilizes Amid Geopolitical Tensions and Fed Rate Cut Expectations

The dollar index held steady around 100.9 on Tuesday, recovering from a 13-month low reached in the previous session. This stability was supported by heightened safe-haven demand due to escalating geopolitical tensions in the Middle East, where Israel and Hezbollah exchanged missile strikes over the weekend, raising concerns about a broader conflict that could involve Iran. Despite this, the dollar faces pressure from anticipations that the Federal Reserve may soon begin cutting interest rates. In his Jackson Hole address on Friday, Fed Chair Powell indicated that it's time to adjust policy due to increasing risks to the labor market, while remaining confident that inflation will eventually meet the Fed's 2% target. Additionally, Monday’s data showed a stronger rebound in durable goods orders for July. Investors are now awaiting this week’s initial jobless claims and the Fed’s preferred PCE price index report for further insights into the future direction of interest rates.

In the pair, which has been rallying for 2 consecutive weeks, the first support level is at 1.1150. If this level is breached, the next supports to watch will be 1.1100 and 1.1060. On the upside, the first resistance is at 1.1220; if this level is surpassed, the next targets will be 1.1250 and 1.1300.

The Japanese Yen is Still Seen as a Safe-Haven Asset After Retracement

The Japanese yen fell toward 145 per dollar, retreating from a three-week high as the US dollar strengthened. Despite this, both currencies saw increased safe-haven demand due to ongoing geopolitical tensions in the Middle East. The yen remains underpinned by the contrasting monetary policies of Japan and the US. Recently, Bank of Japan Governor Kazuo Ueda indicated that the central bank might adjust its monetary policy if its economic forecasts prove accurate, hinting at the possibility of further rate hikes. Yet, Federal Reserve Chair Jerome Powell suggested at Jackson Hole that it’s time to revise policy in light of rising labor market risks while expressing confidence that inflation will eventually hit the Fed’s 2% target. Investors are now focused on upcoming data, including July’s industrial production, retail sales, and unemployment figures, as well as August’s inflation numbers from Tokyo, to gauge Japan’s economic and interest rate outlook.

From a technical perspective, the first resistance level is at 145.15. If this level is surpassed, the next targets will be 145.75 and 146.30. On the downside, the initial support is at 144.35; if this level is breached, the next supports to watch will be 143.40 and 142.50.

Gold's Decline Continues as Fed Officials Hint at Imminent Rate Cuts

Gold prices fell below $2,510 per ounce on Tuesday, despite expectations of imminent US rate cuts and rising geopolitical tensions. Last week, Federal Reserve Chair Jerome Powell indicated a likely interest rate cut in September, signaling the central bank's readiness to lower rates as inflation nears its 2% target, while also noting concerns about a weakening labor market. On Monday, San Francisco Fed President Mary Daly supported Powell’s dovish view, stating that “the time to adjust policy is upon us.” Similarly, Richmond Fed President Barkin expressed support for reducing interest rates in light of a cooling labor market, despite still seeing potential inflationary risks. Meanwhile, escalating geopolitical risks in the Middle East have driven increased demand for safe-haven assets such as gold.

Technically the first support level is at 2,500. If this level is breached, the next supports to watch will be 2,470 and 2,430. On the upside, the initial resistance is at 2,520; if this level is surpassed, the next targets will be 2,532 and 2,550.

GBP/USD Pulls Back Below 1.3200, Ending a Winning Streak

GBP/USD pared recent gains to start the new trading week, falling below the 1.3200 mark on Monday and ending a seven-day winning streak that had lifted the pair over 3% from 1.2800 to a 29-month high of 1.3230. UK markets were closed for a banking holiday, resulting in thin trading volumes for the Pound Sterling and giving the Greenback a boost. Market sentiment is adjusting after a period of increased risk appetite, following the Federal Reserve’s near-confirmation of upcoming rate cuts in September, provided there are no significant changes in economic data.

For GBP/USD, the initial support lies at 1.3180, followed by 1.3130 and 1.3100 below. On the upside, the first resistance is at 1.3240, with subsequent levels at 1.3280 and 1.3320 if the pair breaks above this resistance.

Silver Prices Near Five-Week High Amid Fed Policy Speculation

Silver traded above $29.90 per ounce on Tuesday, staying near its highest levels in five weeks as Federal Reserve Chair Jerome Powell reinforced expectations of an interest rate cut in September. In his Jackson Hole address last week, Powell indicated that it is time to adjust policy due to rising risks to the labor market, while expressing confidence that inflation will return to the Fed’s 2% target. The market widely anticipates that the Fed will begin easing policy in September, though there is uncertainty about the magnitude of the initial rate cut. Traders are currently pricing in around 100 basis points of reductions over the Fed’s remaining three meetings this year. Additionally, silver received support from increased safe-haven demand following Hezbollah’s missile attacks on Israel over the weekend, which were a response to the assassination of a senior commander in Beirut last month.

From a technical perspective, silver is currently trapped within a narrow range. The first resistance level to watch is at 30.00. If silver breaks above this level, the next resistance levels to watch will be 30.30 and 30.75, respectively. On the downside, the initial support level is at 29.15, with subsequent support levels at 28.75 and 28.05.