Gold rises nearly 1% as easing US-Iran tensions weigh on the dollar

Gold prices climbed nearly 1% during European trading on Monday at the start of the new week, rebounding after Friday's decline as a weaker US dollar and falling oil prices supported the precious metal amid growing hopes that tensions between the United States and Iran may continue to ease, particularly after Washington postponed new military action to allow diplomacy another chance.

As concerns over rising inflationary pressures eased, markets also scaled back expectations that the Federal Reserve will raise interest rates again this year.

Investors are now looking ahead to a series of key US economic releases throughout the week that are expected to provide clearer guidance on the outlook for monetary policy and the timing of any future Federal Reserve action.

The Price

• Gold rose about 1.0% to $4,079.81 per ounce from the opening level of $4,043.21, after touching an intraday low of $4,043.21.

• At Friday's settlement, gold fell 1.5%, marking its first daily decline in three sessions as demand softened.

• During July, gold gained 0.9%, posting its first monthly advance since February, supported by bargain buying and easing military tensions between the United States and Iran.

US dollar

The US Dollar Index fell about 0.3% on Monday, extending its losses for a fifth consecutive session and touching a seven-week low of 99.42 as the greenback weakened broadly against a basket of major currencies.

A weaker US dollar makes dollar-denominated gold more attractive to buyers using other currencies, helping to support demand.

The decline in the dollar has been driven by fading safe-haven demand as geopolitical tensions in the Middle East eased and optimism grew that the United States and Iran could move closer to a peace agreement.

Oil prices

Oil prices fell more than 8% on Monday, moving close to their lowest levels in several weeks as concerns over supply disruptions from the Middle East eased following a reduction in military activity around the Strait of Hormuz.

Lower oil prices also reduce fears of accelerating inflation, reinforcing expectations that major central banks could leave monetary policy unchanged for an extended period this year.

Developments in the Iran conflict

• Military tensions in the Middle East have eased as reciprocal strikes between the United States and Iran have come to a halt.

• US President Donald Trump announced that he had canceled a planned military strike against Iran on Sunday, choosing instead to give diplomacy another opportunity.

• Trump said talks with Iran are scheduled to begin on Monday, while Tehran and Oman continue discussing mechanisms to safeguard shipping and restore normal transit through the Strait of Hormuz.

• No final agreement has been reached, with significant differences remaining over Iran's nuclear program, maritime security, and broader de-escalation measures.

US interest rates

• Three Federal Reserve officials said on Friday that inflation could remain above the central bank's 2% target unless short-term borrowing costs are raised promptly.

• With oil prices falling, CME Group's FedWatch Tool now shows the probability of the Federal Reserve leaving interest rates unchanged at its September meeting rising from 33% to 37%, while the probability of a 25-basis-point rate increase has fallen from 67% to 63%.

• For the December meeting, the probability of rates remaining unchanged has increased from 13% to 16%, while the likelihood of a 25-basis-point hike has eased from 87% to 84%.

• Investors will continue to monitor incoming US economic data and comments from Federal Reserve officials to reassess the outlook for monetary policy.

• A busy week of US labor market data lies ahead, with June JOLTS job openings due on Tuesday, July ADP private payrolls on Wednesday, weekly jobless claims on Thursday, and the July nonfarm payrolls report on Friday.

Economic Outlook

We expect gold to remain supported at the start of the week, although gains are likely to stay limited as markets await greater clarity on the outcome of the upcoming US-Iran talks.

If negotiations officially begin and meaningful progress is made toward a new agreement, further declines in both the US dollar and oil prices could provide additional support for gold and other precious metals.

SPDR Gold Trust

Holdings in the SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, declined by 0.85 metric tons on Friday, marking a second consecutive daily decrease and bringing total holdings down to 1,007.02 metric tons, the lowest level since July 20.