The US dollar index (DXY) closed relatively stable on Friday, despite receiving support from a surge in WTI crude oil prices, which rose by around 4% in a single day. This rise in energy prices has fuelled concerns about higher inflation, opening the door for the Federal Reserve to maintain a tight monetary policy stance, a factor that has historically supported a stronger dollar. The sell-off in the stock market also boosted demand for the dollar as a liquid and safe-haven asset.

However, the dollar’s strength was short-lived. The decline in US government bond (T-note) yields weakened the dollar’s attractiveness from an interest rate differential perspective, causing the dollar index to relinquish most of its gains before the close of trading.

US Economic Data: Mixed Signals

Friday’s release of US economic data showed mixed results:

• Housing starts (new home construction) surged significantly in June, far exceeding market expectations.
• Building permits, an indicator of future construction activity, actually, fell and fell short of analyst projections.
• Manufacturing production was stagnant in June, unchanged from the previous month and slightly missing estimates for a slight increase.
• The import price index (excluding oil) rose more than expected, indicating persistent inflationary pressures from imports.

Meanwhile, the University of Michigan’s consumer sentiment index for July jumped to a five-month high, well above expectations. Interestingly, one-year inflation expectations from the same survey actually fell, indicating consumers are becoming more optimistic about future price prospects. Longer-term inflation expectations (5-10 years) remained relatively stable, as expected.

Hawkish Statement from a Fed Official

The president of the Cleveland Federal Reserve also delivered a hawkish statement, emphasising that persistently high inflation remains his primary concern, amid persistently strong consumer spending and low unemployment. Such statements typically reinforce expectations that the US central bank will keep interest rates high for longer, a sentiment that supports the dollar but weighs on assets like gold and silver.

However, the swaps market currently prices in only a 14% chance of a 25-basis point rate hike at the upcoming FOMC meeting in late July. Meanwhile, interest rate futures data shows that more than two-thirds of market participants expect a rate hike before the end of the year, although this month’s decision is highly likely to leave rates on hold.

US-Iran Geopolitical Tensions Drive Oil Prices

The escalation of the conflict between the United States and Iran has been a major driver of rising crude oil prices. The US reportedly launched further attacks on Iran for six consecutive days, targeting coastal surveillance facilities, air defence systems, military logistics infrastructure, and maritime assets. In retaliation, Iran attacked several US bases in Kuwait, Jordan, and Bahrain.

Kuwaiti authorities reported damage to water desalination facilities and power plants as a result of the attacks, while dozens of drones targeting vital institutions were intercepted by the local military. The US President reiterated his commitment to continue increasing military pressure until Iran halts attacks on ships in the Strait of Hormuz and reopens the shipping lane.

Such geopolitical tensions directly push oil prices higher, which in turn increases global inflation expectations and pressures central banks to adopt a more cautious monetary policy stance.

US Treasury Yields Drop Significantly

The yield on the 10-year US government bond fell to around 4.5%, far from the nearly two-month high it reached in mid-July. This decline occurred in line with softening inflation data and declining investor risk appetite.

Consumer and producer inflation data for June both showed a downward trend, while inflation expectations from the Michigan survey also weakened for the second consecutive month. This indicates that the decline in wholesale fuel costs is beginning to spread to the broader economy.

Geopolitical uncertainty also increased following the US President’s statement regarding alleged foreign interference in the 2020 presidential election, which has the potential to disrupt trade relations that had been relatively improving following the previous year’s tariff hikes. However, the risk of inflation remains a looming threat as many merchant ships avoid the Strait of Hormuz due to military conflict.

Gold and Silver: Between Selling Pressure and a Potential Rebound

On Friday, gold and silver prices weakened at the start of the session; gold hit its lowest level in two and a half weeks, while silver fell to its lowest level in nearly seven and three-quarter months. The 4% surge in oil prices also pressured precious metals, raising global inflation expectations and potentially prompting global central banks to tighten monetary policy.

Hawkish statements from Cleveland Federal Reserve officials added pressure to gold and silver, given that the primary focus of US monetary policy remains on controlling persistent inflation.

However, precious metals managed to reverse course and closed higher at the end of Friday’s trading. The weakening dollar in the afternoon session triggered short covering, while the decline in global bond yields provided additional support for gold and silver prices.

Gold Technical Analysis: Bearish Trend Remains Dominant

Technically, gold prices are currently in a bearish trend, moving below all major EMA lines and being held back by the resistance area around 4,100. This selling pressure was triggered by several factors:

1. A strengthening US dollar
2. The Fed’s still-tight interest rate policy
3. Decreased demand for safe-haven assets due to the temporary easing of geopolitical tensions

However, a slight positive divergence signal has emerged on the RSI indicator, indicating a potential weakening of selling momentum. Gold prices are currently in a critical consolidation phase near the key support level of 3,943. A break below this level could potentially trigger a continuation of the downward trend towards the 3,900 area.

ETF Fund Flows Remain Under Pressure

Fund holdings data shows an ongoing liquidation trend:

• Gold holdings in ETFs fell to a nine-and-a-half--month low, after previously reaching a three-and-a-half--year peak at the end of February.
• Silver holdings in ETFs also plummeted to an 11-and-three-quarter--month low, far from the three-and-a-half--year peak recorded at the end of December.

This liquidation trend is a medium-term bearish factor for precious metal prices.

Central Bank Demand Remains Strong

On the other hand, central bank demand for gold remains a long-term price support factor. The People’s Bank of China (PBOC) reportedly added another 480,000 troy ounces to its gold reserves in June, marking the 20th consecutive month that the PBOC consistently increased its gold reserves. This consistent accumulation of gold by central banks is often viewed as a positive long-term signal for the precious metals market, although short-term pressures from the dollar and interest rates still loom.

Strategic Conclusion

Global financial markets are currently at a crossroads between inflationary pressures stemming from surging oil prices and US-Iran geopolitical tensions, on the one hand, and signs of economic weakness and declining bond yields, on the other. The US dollar has received temporary support from inflationary factors and the Fed's hawkish stance, but declining yields have limited its gains.

For gold and silver, short-term technical trends remain bearish, with the key support level at 3,942 for gold being a crucial point for market participants to monitor. However, structural demand from central banks, China in particular, as well as the potential for a reversal in the dollar and bond yields, still opens up opportunities for a rebound for precious metals in the near future.