Gold slid more than 1.60% on Tuesday as the US dollar firmed on renewed haven demand following US defensive strikes in southern Iran linked to activity around the Strait of Hormuz. XAU/USD fell below $4,500 after touching an intraday high of $4,580, while the US Dollar Index rose 0.17% to 99.17 and US equities gave back earlier gains. Oil extended its retreat, with WTI down 2.75% to $94.34 a barrel, and the policy-sensitive two-year Treasury yield eased by nearly four basis points to 4.074%.
Rates pricing showed money markets assigning a 58% chance of a Federal Reserve rate rise by year-end, while the June meeting was priced for a 99% hold at Kevin Warsh’s first meeting as Fed Chair. Household sentiment softened, with the Conference Board’s Consumer Confidence Index at 93.1 in May versus a 92 forecast, and two-thirds of respondents reporting lower spending due to higher prices. Separately, Nikkei said the ceasefire was extended for 60 days, with Iran to clear mines within 30 days, alongside steps on shipping passage, transit fees, nuclear talks and a gradual easing of sanctions; attention now turns to US housing data, Durable Goods Orders, the second Q1 2026 GDP reading, labour figures and Core PCE.
US Dollar Strength as the Dominant Market Force
Based on the current situation, we see the US Dollar’s strength as the primary factor driving markets, even more so than traditional safe-haven assets like gold. The conflict in the Strait of Hormuz has triggered a flight to the liquidity and safety of the dollar, not the yellow metal. This dynamic suggests that for now, being bullish on the dollar is the prevailing trade.
We are paying close attention to the strong inverse correlation between the Dollar Index (DXY) and gold, which historical data from the CME Group shows often sits near -0.5, meaning they move in opposite directions. Recent Commitment of Traders (COT) reports from the CFTC have indicated that large speculators were already trimming their net-long gold futures positions before this flare-up. This suggests the path of least resistance for gold is currently downwards.
Volatility, Oil, and the Inflation Trade Setup
The rise in market uncertainty has caused gold’s implied volatility to increase, with the CBOE Gold Volatility Index (GVZ) climbing to 18.5, a multi-week high. We believe this presents an opportunity for derivative traders to purchase put options on gold, targeting strikes near the 200-day moving average around $4,387. This strategy offers a defined-risk way to profit if the dollar continues to rally and gold breaks below its recent lows.
The unusual drop in oil prices is also a key factor, as it is dampening inflation expectations ahead of the crucial Core PCE data release. The U.S. Energy Information Administration (EIA) has previously noted that sustained changes in energy costs significantly impact headline inflation numbers. This temporary easing of price pressure gives the Federal Reserve more room to remain on hold, but it also reduces demand for gold as an inflation hedge.
Therefore, we are positioning for a significant market reaction to the upcoming Core PCE inflation report. A hotter-than-expected number would likely reinforce dollar strength and could accelerate gold’s decline toward $4,300. A surprise miss on the downside, however, could weaken the dollar and trigger a sharp short-covering rally in gold back above the $4,500 level.
