Gold rose more than 3% after the US and Iran agreed a framework to end the Middle East war, lifting XAU/USD to about $4,367 and extending a rebound from last week’s near seven-month low of $4,023. An MoU is expected to be signed in Switzerland on Friday, and the shift in risk sentiment pulled the US Dollar lower while WTI slid to its weakest level in nearly three months, trading near $79 a barrel.
Earlier in the conflict, the metal traded more like a rate-sensitive asset as higher Oil stoked inflation concerns and encouraged expectations that central banks such as the Fed would keep policy tight. Gold fell nearly 20% during the war as markets priced the possibility of a Fed hike later this year, but easing energy prices have prompted traders to pare those bets ahead of the Fed decision on Wednesday, where rates are widely expected to be unchanged. Inflation has more than doubled from the Fed’s 2% target, while technical levels show XAU/USD below the 20-day SMA near $4,415, with RSI around 45; resistance sits near $4,682 and support around $4,149, then $4,000.
Geopolitical Risk Premium and Volatility Reaction
With the sudden US-Iran peace framework, we are seeing a classic geopolitical risk premium evaporate from the market. The CBOE Crude Oil Volatility Index (OVX) has collapsed from recent highs near 45 down to 30, reflecting the market’s relief. Our immediate response is to consider selling out-of-the-money call options on WTI crude to capitalize on this sharp drop in both price and volatility.
For gold, we are cautiously bullish but recognize the technical resistance ahead and the uncertainty of the deal being finalized. Implied volatility on gold options has fallen from over 25% to around 18%, making long options cheaper but also indicating less fear. We are initiating bullish call spreads on XAU/USD, targeting a move toward $4,500 while defining our risk ahead of Wednesday’s Fed meeting.
Market Repricing and Upcoming Fed Catalyst
The market has aggressively repriced Federal Reserve expectations, with fed funds futures now showing less than a 5% chance of a rate hike this year, down from 30% just last week. This is weighing heavily on the US Dollar Index (DXY), which has decisively broken below the 104 support level. We are positioning for further dollar weakness, particularly against the Euro and Japanese Yen.
We are reminded of historical precedents, such as the sharp decline in oil prices following the end of the first Gulf War in 1991. However, since the memorandum of understanding is not yet formally signed, a degree of caution is necessary. This is why we are using defined-risk options strategies rather than taking on the unlimited risk of shorting futures contracts directly.
The next major catalyst is the Fed’s monetary policy announcement this Wednesday. We will be closely watching for any change in tone from Chair Kevin Warsh regarding inflation, given that the latest CPI print still showed a 4.1% annual increase. Acknowledgment of the disinflationary pressure from falling energy prices could fuel another leg up in precious metals and equities.
