What to Know
- Gold gained early but lacks strong follow-through amid elevated interest rates.
- Lower U.S. yields could support gold if the pullback attracts buyers.
- USD/JPY remains supported by the U.S.-Japan interest rate differential.
- Bank of Japan intervention remains a key risk for USD/JPY bulls.
- Geopolitical headlines continue to drive volatility across both markets.
The backdrop right now is one of a bit of confusion and concern, obviously with the Middle East essentially a never-ending problem, and of course most of what's moving the bond market seems to be the latest headline coming from either Tehran or Washington D.C.
It's been difficult for some markets to get any type of clarity. There have been moments where traders are pricing in the idea of a calming of tensions, followed by moments of complete disarray and despair. So in this environment, interest rates coming out of places like the United States continue to be a major story here.
Interest Rates and Market Momentum
When I look at the gold market, the first thing I see is that rates have been drifting a little lower over the last couple of days, but they are still stubbornly high. And therefore it is not a huge surprise that the market is having trouble gaining any real traction during the session on Tuesday, although it's worth noting that we did gap higher to gain about 0.5% right off the bat. It's just that we're lacking serious follow-through.
With that and the fact that the headlines continue to be something that only one can guess at, we have a situation where gold may have trouble keeping up this momentum. A pullback, more likely than not, offers value. With this type of breakout and this type of volume, that does mean somebody out there wants this market to go higher, but it may be a little extended.
USD/JPY
The US dollar has initially fallen against the Japanese yen to show signs of weakness, only to turn around and rally again. All things being equal, this is a market that is riding the back of the massive candlestick on Monday as traders look like they're willing to take on the Bank of Japan and its recent intervention.
Interest Rate Differential Driving Demand
That intervention was combined with US officials trying to save the yen, but quite frankly, the interest rate differential still remains attractive. Therefore, there should be buyers on dips. But this is obviously a very dangerous place to play.
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