XAU/USD extends the rally above $2,050 on geopolitical tension

• Gold price holds above $2,050 in Tuesday’s Asian trading hours.
• Modest gains in gold are underpinned by rising tensions in the Red Sea and the risk-off mood.
• Atlanta Fed’s Bostic said inflation could seesaw if policymakers cut rates too soon.

Gold price (XAU/USD) posts modest gains above the $2,050 mark during the early Asian session on Tuesday. The escalating geopolitical tension in the Red Sea and the risk-off environment benefit a safe-haven asset like gold. At press time, the gold price is trading at $2,055, gaining 0.06% for the day.

Meanwhile, the US Dollar Index (DXY), a measure of the value of the USD against a weighted basket of currencies used by US trade partners, has extended its consolidative theme since the beginning of the year near 102.60. The Treasury yields edge lower, with the 10-year yield standing at 3.95%.

The market has priced in 86% odds of a rate cut by March, with the overall 2024 easing cycle priced at around 166 basis points (bps), compared to 75 bps projected by the Fed dot plot. Nonetheless, Atlanta Federal Reserve (Fed) Raphael Bostic said on the weekend that rates need to stay on hold until at least summer to prevent prices from rising again. He further stated that inflation must surely get back to the 2% target, and a bad outcome could occur if policymakers start easing too fast.

Furthermore, Houthi rebels fired a missile, striking a US-owned ship Monday just off the coast of Yemen in the Gulf of Aden, less than a day after they launched an anti-ship cruise missile toward an American destroyer in the Red Sea. This, in turn, might boost the performance of yellow metal as it is considered a safe-haven asset, meaning that investors tend to folk to it in times of uncertainty and geopolitical tension.

Looking ahead, the development surrounding geopolitical tension in the Middle East remains in focus. Later on Tuesday, the US NY Empire State Manufacturing Index for January and the Fed’s Waller speech will be monitored by market players.