Recent news from the Middle East shocked global markets, causing a significant drop in stock markets around the world. However, it did not trigger a rise in dollar, but instead boosted demand for gold.

The death of many Palestinian refugees from a bomb hitting a hospital in the Gaza Strip led to heightened expectations of an escalation in the already tense situation in the Middle East. Against this backdrop, government bond yields climbed up, with the yield of the 10-year Treasury benchmark confidently approaching pre-crisis 2007 levels. This suggests that investors do not view US government bonds as safe assets.

Several things may be the cause for this. The first could be the rise in the Fed's interest rates, as in 2007, it fluctuated at 5.00%-5.25. Now it lies slightly higher at 5.25%-5.50%. As for inflation, it hit 4.3% back then, while now it lies at 3.7%. The mortgage crisis followed those conditions, which marked the end of the prosperity era in the US, particularly the credit boom.

The present situation looks very much like what happened back then, with the key difference being that the government lacks the resources to address the accumulated problems in the US economy. Financial stimulus by injecting unbacked dollars no longer works; it only increases the national debt. Observing this, investors, especially countries that used to buy US government bonds and thereby offset inflationary pressure in the US, started to divest from these assets, leading to a significant increase in yields.

In this scenario, further interest rate hikes will not only harm the US economy but also potentially bankrupt it. Attempts to resolve these problems through conventional means, such as war, do not help. Recent conflicts, whether open or subtle, also negatively affect the US.

Going back to the crisis in the Middle East, it prevents capital flows into the US and worsens the investment climate. Interestingly, in the recent past, the US benefited from such crises, but it appears those times have ended.

Watching all these developments, the Fed may no longer raise interest rates for the rest of this year, and the risks of a new global and possibly nuclear war may prompt investors to shift to cash or gold. In fact, New York Fed President John Williams stated yesterday that interest rates will remain at current levels for some time to push inflation down to the desired 2%. Fed Governor Christopher Waller also made it clear that the central bank no longer needs to raise rates further.

Although the statements could be considered as clear signals, most investors prefer to wait for the confirmation from Fed Chairman Jerome Powell, who will speak today at the Economic Club in New York.

In conclusion, the Federal Reserve, primarily through its leader, will continue to talk about rate hikes, exerting verbal pressure on inflation. However, they may not actually do so, and a pause in November may well extend to December. After all, continuing the rate hike cycle will not just lead to the rise in Treasury yields, but also cause a full-scale recession triggered by the risk of US bankruptcy.

Forecasts for today:

XAU/USD

Gold trades above 1946.00, supported by the ongoing conflict in the Middle East. The escalation of the crisis, along with issues in the US economy that will keep the Federal Reserve from raising interest rates, will stimulate sustained demand for the metal. If the price remains above this level, there may be an increase toward 1982.45.

USD/CAD

The pair trades below 1.3735. If Powell does not provide clear promises to continue raising interest rates, pressure will return on dollar, resulting in an increase in risk appetite. In this case, a decline towards 1.3600, supported by high oil prices, may be seen.