Geopolitical tensions between Israel and Iran escalated sharply over the weekend after Israel launched a “limited” ground operation against Hezbollah, the Iranian-backed militant group, in southern Lebanon. This operation, which saw Israeli forces crossing the border, follows the recent assassination of Hezbollah leader Hassan Nasrallah. Iran has vowed to retaliate against the killing, and Israel continued its strikes over the weekend, claiming the death of another senior Hezbollah figure.
The heightened geopolitical risk has unsettled global markets, pushing investors toward traditional safe-haven assets like gold. The precious metal regained some ground amid fears of Iranian retaliation, while the U.S. dollar pulled back as investors adopted a cautious stance ahead of key U.S. economic data releases. U.S. Treasury yields, which had spiked earlier, reversed course as deteriorating risk sentiment capped further downside in gold prices.
In the week ahead, the U.S. ISM Manufacturing PMI and the JOLTS job openings survey are expected to shed light on the health of the U.S. economy. A weaker-than-expected showing could reignite speculation of an aggressive Federal Reserve rate cut in November, as markets assess the likelihood of monetary easing.
Earlier expectations of a 50 basis point (bps) rate cut in November were tempered after Fed Chair Jerome Powell pushed back against outsized rate cuts during his speech at the National Association for Business Economics (NABE) Annual Meeting in Nashville. Powell signaled that while the Fed is committed to easing, the pace will likely be gradual, stating, “This is not a committee that feels like it’s in a hurry to cut rates quickly.” He indicated that if the economy performs in line with expectations, the Fed would likely implement two additional quarter-point cuts this year, aligning with the forecasts from the September 18 meeting.
Powell’s comments, favoring a more measured approach to rate cuts, fueled a rally in the U.S. dollar and sent U.S. Treasury yields rebounding across the curve. Gold prices, in response, tumbled to a four-day low in the wake of Powell’s remarks.
However, the decline in gold was short-lived. Atlanta Fed President Raphael Bostic cautioned that the central bank might need to make further aggressive rate cuts if the U.S. labor market weakens significantly. His comments provided a brief respite for gold, which stabilized amid renewed market uncertainty.
As of now, market pricing suggests a reduced probability of a 50 bps rate cut at the Fed’s November meeting, with the odds slipping to 36%, down from 53.3% just a day earlier. The ongoing geopolitical instability, combined with mixed economic signals from the U.S., will likely keep markets on edge as investors navigate the path ahead for both monetary policy and global risk factors.