Safe haven assets riding high as Middle East conflict grinds on

Twelve days after Hamas’ surprise invasion of southern Israel, the threat of the conflict boiling over into a wider regional crisis remains a troubling possibility. While Israel has yet to invade the Gaza Strip, it has laid siege to the Hamas stronghold and conducts frequent bombing raids – often resulting in widespread civilian casualties. Iran and Jordan have both warned against any infantry incursion into Gaza, and Hezbollah militants in southern Lebanon have conducted sporadic attacks on Israeli civilian and military targets in the north of the country.

The situation remains chaotic and dangerous. Western leaders have been flocking to the region in an attempt to lower tensions with mixed results, and markets are spooked. In our article last week, we pointed out that traders should remain wary, as this conflict's future direction and impact are unpredictable. This remains the case.

Unsurprisingly, the assets that have benefited the most from the conflict are traditional safe havens like gold and the USD. Crude oil prices are also being supported as long as the threat of a wider Middle East conflict remains.

Gold (XAU)

The godfather of safe-haven assets, gold has been on a strong bull run since the beginning of the conflict, rising to its highest level since August on Wednesday, 18^th October. War concerns and a weaker USD had been favouring the precious metal. As the USD has strengthened again this week, we would normally expect to see gold prices fall. However, the Middle East crisis has provided strong support, and the XAU/USD is holding steady around the 1950 mark.

USD (DXY)

The USD, as represented by the DXY index, made huge gains last week but experienced a sustained fall earlier this week as better-than-expected China data weighed on the currency. This trend has now reversed. A combination of risk-off sentiment and strong US economic data has provided a boost as markets watch the conflict nervously and weigh the increased probability of a further rise in interest rates. While the conflict continues in Israel, we can expect the USD to remain supported, but most analysts will be watching for the Fed’s interest rate decision due on November 1^st.  

Crude Oil (BRENT, WTI)

On Wednesday, 18^th October, Iran’s foreign minister, Hossein Amir-Abdollahian, called for Islamic countries to boycott Israel, including stopping oil shipments. The threat of an oil embargo caused crude oil prices, already high due to the crisis and tighter supplies, to jump. OPEC quickly announced that no action is expected to follow the Iranian demand. This, coupled with a loosening of the US oil sanctions on Venezuela, has led to a drop in oil prices, though they remain elevated and sensitive to any intensification or broadening of the conflict.

Israeli shekel (ILS)

A quick note on the shekel. We pointed out last week that the Bank of Israel was well-positioned to protect the ILS from speculative short bets. This theory is being tested to the full. The shekel has fallen another 3.8% against the USD following the Bank of Israel´s pledge last week to sell $30 billion to support the currency. The USD/ILS is up almost 5% since Hamas’ invasion.

“In the event of escalation [of the war], we think the Bank of Israel has sufficient reserves to prevent a full-blown currency crisis, especially as significant financial inflows from abroad will likely support the shekel,” said Simon Harvey, head of currency analysis at Monex Europe.

While this may be the case, it’s certainly one for traders to watch.

Technical Analysis

In the wake of escalation in the Middle East conflict, gold soared to its highest level since early August on Wednesday, closing out the day at the 1947.49 level.  At 118 pips up since the war broke out on 7 October, gold prices crossed above the 200-day SMA (pink) on Wednesday, while the MACD confirmed the bullish momentum.  The RSI is in positive territory, verging on the overbought zone, but the precious metal is still positioned for further upside moves. Should it move beyond the overnight swing-high of the 1,963 USD region, this may see it reclaim the $1,982 level seen in mid-July.

Prices of Brent Crude increased rapidly in anticipation of OPEC’s emergency meeting, a response to Iran’s embargo calls made to the Organisation of Islamic Cooperation. However, fears of rising oil prices were put to rest when OPEC confirmed it would not meet, sending prices lower. The Middle Eastern conflict has also played into the upward momentum, with the MACD favouring further bullish momentum, and the RSI above 50, but not yet in oversold territory.

Resistance sits at the 38.2% Fibonacci Retracement level of 91.42 USD, with upside moves looking towards the 95.50 USD level. Immediate support resides at the 89.00 USD level.