- Data last week revealed a sharp decline in business activity in the US services sector.
- Markets expect at least 58-bps of Fed rate cuts this year.
- Trump delayed the implementation of tariffs on Canada and Mexico.
Gold prices fell as investors took profits from the recent peaks, and the dollar soared amid US tariff uncertainty. Meanwhile, market participants looked forward to the US core PCE price index report for more clues on US monetary policy.
Gold has had a bearish week so far after reaching new peaks on Monday. The rally at the start of the week came from an increase in Fed rate cut expectations and fears of the looming implementation of Trump’s tariffs on Canada and Mexico.
US business activity (Source: S&P Global PMI)
Data last week revealed a sharp decline in business activity in the US services sector. The PMI came in at 49.7 compared to the forecast of 53.0. This drop to contraction indicated economic weakness that could pressure the Fed to lower borrowing costs. As a result, rate cut expectations increased, with markets expecting at least 58-bps of rate cuts this year. Lower interest rates are bullish for gold as they increase the appeal of the non-yielding metal compared to other assets.
However, the outlook for Fed rate cuts will keep changing with incoming data. At the same time, Trump’s tariff policies will keep shaping the outlook for the US economy and monetary policy. On Monday, the US President was ready to start the March 25% tariff on Canadian and Mexican goods. As a result, there was uncertainty about the global economy that had investors rushing to the safe-haven yellow metal.
However, sentiment shifted, and risk appetite improved when he delayed the implementation until April. Although the risk of trade wars fell, it was only delayed. If the US eventually implements these tariffs, there will be responses that could lead to trade wars. This ever-present risk will keep supporting gold prices.
Meanwhile, Trump proposed a new reciprocal tariff on European goods and cars. Such an outcome would weaken another major economy and increase the risk of a global trade war. This would raise concerns about the global economy, boosting gold.
Elsewhere, market participants are looking forward to the US core PCE price index report that will show the state of inflation. A bigger-than-expected figure will lower Fed rate cut bets, hurting gold prices. On the other hand, if inflation is soft, rate-cut bets will increase, boosting gold.
