- Comments at the UN dashed hopes for a near-term deal between the US and Iran.
- Trump rejected Iran’s peace proposal.
- Traders are pricing a 70% chance of a Fed hike in October.
Gold prices rebounded on Tuesday after collapsing to an over 7-week low in the previous session. The recovery was a pause in the drop, driven by a surge in Treasury yields and bets on a Fed rate hike. Uncertainty over a deal between the US and Iran sent oil prices higher last week, increasing inflation concerns.
Spot gold (Source: Bloomberg)
The yellow metal plunged on Monday, extending last week’s downtrend as the opportunity cost of holding non-yielding assets increased. Since Wednesday, market participants have been focused on talks between the US and Iran. They started at the UN, where the presidents of the two nations traded hostile remarks.
The comments at the UN dashed hopes for a near-term deal. Instead, it became clear that both nations were ready for a prolonged war. Later in the week, Iran presented the US with a peace deal with conditions similar to those of their June agreement. According to Tehran, if the US agreed, the Strait of Hormuz would be open in seven days. However, Trump quickly rejected the deal.
A separate report revealed that Trump was willing to give Iran sanctions relief on nuclear matters. However, the US president denied any such plans. The back-and-forth that has shaped market movements since the war began is back. At the same time, the future remains uncertain, and risk appetite is low.
As a result, inflation worries rose as traders bet on a prolonged war that will send oil prices higher. Initially, futures indicated one more Fed rate hike in December. Meanwhile, the likelihood of a hike in October was at 49%. However, this increased to 70% after last week’s developments. Although experts are giving diplomacy a chance, the outlook will only change when there is a final agreement for lasting peace.
“The heightened expectations for more Fed rate hikes are keeping the dollar up, and yields remain elevated. I think the upside might be somewhat limited, and the market is going to stay focused on the PCE inflation data tomorrow and the jobs data on Friday,” Grant said.
Market focus is now shifting to US economic data, especially the non-farm payrolls report. An upbeat number will give the Fed more room to hike. On the other hand, soft figures could reduce rate-hike bets.
