- In the second quarter, the US economy expanded by a smaller-than-expected 1.5%.
- The US and Iran are negotiating to reopen the Strait of Hormuz.
- Traders are pricing a 59% chance of a Fed rate hike in September.
Gold futures gained on Wednesday as reports indicated that the US, Iran, and Oman were close to a truce agreement. Meanwhile, the US dollar and oil saw a decline. Meanwhile, market participants are gearing up for the US nonfarm payrolls report due on Friday.
Gold price (Source: Bloomberg)
Market sentiment has improved since Saturday, when Trump said he had canceled a planned attack on Iran to give diplomacy a chance. Before this, the conflict had escalated with the US hitting Iran for targeting its base in Jordan. At the same time, Iran’s allies attacked Saudi Arabia. Consequently, oil prices rose, increasing inflation concerns and Fed rate hike expectations. Meanwhile, gold fell at the prospect of higher borrowing costs and a stronger dollar.
However, the trend started shifting on Thursday last week when the US released a set of downbeat economic data. In the second quarter, the US economy expanded by 1.5%, below the estimate of 2.1%. Meanwhile, a separate report revealed that the core PCE price index was at 0.1%. A slowing economy and cool inflation could mean a less hawkish Fed and higher prices for gold.
The Fed has been under intense pressure to tighten monetary policy and tame inflation since the Iran war began. Whenever tensions escalate, rate hike bets increase. However, all this time, the US economy has remained strong. Signs of a slowdown would leave less room for the central bank to increase borrowing costs.
At the same time, easing tensions in the Middle East has brought oil prices down, reducing inflation concerns. Talks between the US and Iran have resumed, with the two aiming to reopen the Strait of Hormuz. As a result, the likelihood of a September Fed rate hike came down from 67% to 59%. This supports gold by bringing down the opportunity cost of holding it.
“Gold’s relation with oil is still intact, as oil prices have a tremendous impact on the global economy in terms of inflationary pressure. If we get a very clear roadmap to further de-escalation in tensions, gold prices could move higher,” said Kelvin Wong, a senior market analyst at OANDA.
Traders are now watching out for the nonfarm payrolls report for more clues on future Fed moves.