Middle East Risks Lift USD, Gold Falls - CPT Markets

Market Wrap-up: US-Iran Tensions Revive Fed Hike Expectations

Markets partially retraced their recent gains following softer-than-expected US CPI and PPI data. The US Dollar Index (DXY) has since rebounded to around 100.80 as escalating US-Iran tensions revived expectations that the Federal Reserve could keep monetary policy tighter for longer.

Oil prices continued to trade near their highest levels in more than a month after reports that Tehran had instructed Yemen's Houthi forces to prepare for a potential blockade of oil shipping routes through the Red Sea. The development reinforced concerns over global energy supply and kept geopolitical risk premiums elevated.

Meanwhile, US President Donald Trump continued to threaten airstrikes targeting Iranian power plants and bridges, further intensifying geopolitical uncertainty.

Rising tensions across the Middle East pushed US Treasury yields higher, fueling inflation concerns and strengthening expectations that the Federal Reserve will maintain elevated interest rates. The combination of higher yields and a firmer US dollar weighed on gold, sending the metal down 2% to $3,982/oz in the previous session.

US economic data also remained resilient. June retail sales increased 0.2% month-on-month, matching market expectations but slowing from May's 1.0% gain, largely reflecting higher gasoline prices. Meanwhile, control group retail sales, which feed directly into GDP calculations, eased from 0.8% to 0.5%, in line with expectations.

The labour market also continued to show resilience. Initial jobless claims for the week ending 11 July fell to 208,000, beating expectations of 217,000. The Federal Reserve's Beige Book also acknowledged a solid labour market, with several districts reporting modest, moderate, or stable employment growth.

Looking ahead for today, traders will focus on key US economic releases including Import Prices, Industrial Production, and particularly the University of Michigan Preliminary Consumer Sentiment and Inflation Expectations surveys.

XAU/USD: Gold Falls as Higher Treasury Yields Boost the US Dollar 

Key takeaway:

Gold declined on 16 July as escalating Middle East tensions lifted US Treasury yields, reinforcing inflation concerns and increasing expectations that the Federal Reserve will maintain higher interest rates.

According to the CME FedWatch Tool, markets are currently pricing in around a 55% probability of a Fed rate hike at the September meeting.

The US 10-year Treasury yield continued to edge higher, while the US dollar gained around 0.3%, making gold more expensive for holders of other currencies and adding further downside pressure.

Technical Outlook:

Daily Bias: Bearish

Support: 3,941

Resistance: 4,021

Oil: WTI Holds Near One-Month High on Supply Disruption Fears 

Key takeaway:

WTI crude slipped around 1% on 16 July but remained close to its highest level in more than a month as the US-Iran conflict continued to escalate. Reports that Tehran had instructed Yemen's Houthi forces to prepare for a blockade of Red Sea shipping routes continued to underpin supply concerns.

If both the Strait of Hormuz and Bab el-Mandeb face simultaneous disruptions, pressure on global supply chains would intensify, tanker availability would tighten, and maritime insurance costs would likely rise sharply.

Technical Outlook:

Daily Bias: Cautiously Bullish

Support: 78.81

Resistance: 82.00

DXY: US Dollar Strengthens as Fed Hike Bets Rebound 

Key takeaway:

The US dollar strengthened as resilient labour market data combined with escalating geopolitical tensions to reinforce inflation concerns and revive expectations of further Federal Reserve tightening.

Initial US jobless claims fell to 208,000, outperforming expectations of 217,000 and improving from the previous reading of 216,000.

However, June retail sales growth slowed to 0.2% month on month, down from 1.0% previously, indicating that consumer spending momentum has moderated.

Technical Outlook:

Daily Bias: Bearish

Support: 100.50

Resistance: 100.95

EUR/USD: Euro Slides as Stronger Dollar Outweighs ECB Outlook 

Key takeaway:

The euro weakened as renewed tensions around the Strait of Hormuz boosted demand for the US dollar.

However, according to Reuters, the European Central Bank is expected to leave interest rates unchanged next Thursday before delivering a second rate hike of the year in September as higher energy prices increase inflation risks.

That outlook could help limit the euro's downside in the near term.

Technical Outlook:

Daily Bias: Cautiously Bearish

Support: 1.14060

Resistance: 1.14729

USD/JPY: Japanese Yen Slides as Geopolitical Risks Boost the Dollar 

Key takeaway:

The Japanese yen weakened as renewed US-Iran tensions supported the US dollar, while Japan continued to warn that it stands ready to respond to excessive currency volatility.

Kyodo News reported that the Japanese government will state in its upcoming economic policy plan that decisions on specific monetary policy tools should remain the responsibility of the Bank of Japan.

At the same time, traders remain alert to the risk of official intervention. Finance Minister Satsuki Katayama reiterated that authorities are prepared to act against excessive currency movements whenever necessary.

Technical Outlook:

Daily Bias: Cautiously Bullish

Support: 161.89

Resistance: 162.49

Renewed geopolitical tensions in the Middle East have become the dominant macro driver across global markets. Elevated oil prices have revived inflation concerns, pushing US Treasury yields and the US dollar higher while weighing on gold. Equity markets have lost some momentum as investors reassess the prospect of higher US interest rates for longer.

For now, market pricing remains driven by geopolitical risk and its implications for inflation and Federal Reserve policy expectations. Traders will closely monitor today's US Import Prices, Industrial Production, and especially the University of Michigan Consumer Sentiment and Inflation Expectations data for fresh signals on inflation expectations and the Fed's next policy move.

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