- The dollar and Treasury yields soared on Tuesday after upbeat US inflation data.
- A global trade war would likely harm growth in most major economies, particularly the US.
- Traders will now focus on the US PPI report for more clues on Fed rate cuts.
Gold prices rebounded on Wednesday as the dollar and Treasury yields paused their rally. Meanwhile, in the previous session, the yellow metal dropped after data revealed an acceleration in US price pressures. At the same time, gold has been subdued this week due to rising hopes for more trade deals.
The dollar and Treasury yields soared on Tuesday after upbeat US inflation data. The annual CPI increased by 2.7%, above estimates of 2.6%. At the same time, the monthly figure accelerated from 0.1% to 0.3%, as expected. The report painted a picture of the impact of Trump’s tariffs on price pressures. It is for this reason that the Fed has remained cautious despite the economy’s slowdown. Now, policymakers have to weigh growth against inflation.
Furthermore, Trump is not making it any easier for Powell. He has renewed his tariff threats. The US president has announced higher tariffs on several countries, including Brazil, Japan, South Korea, Canada, the EU, and Mexico. He has also pushed the deadline to August 1.
If tariffs increase next month, there is a high chance that many countries will retaliate. Already, Brazil and the EU have said they are ready to respond in kind. A global trade war would likely harm growth in most major economies, particularly the US. That would put pressure on the Fed to lower borrowing costs. At the same time, higher tariffs might boost inflation, forcing the Fed to strike a balance between growth and inflation.
Meanwhile, gold prices would likely benefit from any economic uncertainty, as investors seek safety from market turmoil. At the same time, risk appetite will plunge. However, there is still hope that most countries can get deals before the new deadline. The EU and South Korea are ready to continue negotiations with the US.
Spot gold (Source: Bloomberg)
As a result, market participants have opted to remain cautious for the time being, waiting to see what happens in August. This has kept gold range-bound.
Traders will now focus on the US PPI report for more clues on Fed rate cuts. After the CPI report, rate cut bets eased, with markets expecting 43 bps of cuts this year, compared to 50-bps before the report. High borrowing costs hurt the appeal of the non-yielding gold.
