- Trump said the ceasefire deal with Iran was currently on life support.
- Annual US inflation increased by 3.8%.
- Analysts are shifting to a more hawkish outlook for the Fed.
Gold prices fell on Tuesday after US data showed a larger-than-expected increase in consumer prices in April. As a result, expectations of a Fed rate cut decreased, while the likelihood of future rate hikes increased. Meanwhile, traders are keeping an eye on developments in the Middle East, where negotiations have stalled.
Gold ended last week stronger, boosted by Wednesday’s rally. The move followed reports that the US had come up with a new proposal to end the war in Iran. Meanwhile, Iran said it was reviewing the proposal, raising hopes that the conflict between the two countries would finally end.
However, these hopes were dashed as tensions reignited towards the end of the week. Strikes broke out in the Strait of Hormuz on Thursday. Moreover, Iran rejected the US proposal and instead sent a counterproposal, which Trump also rejected. He said it was totally unacceptable.
The two nations are fighting over the reopening of the Strait of Hormuz, an end to the US blockade on Iranian ports, and Iran’s nuclear program. If there is no agreement, tensions will remain high, and the ceasefire deal could collapse. Trump said the deal was currently on life support.
US inflation (Source: Bureau of Labor Statistics, Bloomberg)
This week, all focus was on the pivotal US CPI report, which came out on Tuesday. According to the report, annual inflation increased by 3.8% compared to the forecast of 3.7%. Moreover, it was a significant jump from the previous reading of 3.3%.
The upbeat report confirms the fact that a surge in oil is fueling consumer prices. Therefore, it puts extra pressure on the Fed to consider tightening monetary policy. After the report, the likelihood of a rate cut this year dropped. Meanwhile, analysts are shifting to a more hawkish stance amid the possibility of a rate hike.
“Given that inflation is heading in the wrong direction and the labor market is holding up, it’s very unlikely that the Fed will be able to lower interest rates any time soon, and it’s possible that we may start pricing in rate hikes for next year,” said Chris Zaccarelli, chief investment officer at Northlight Asset Management.
Higher borrowing will be bearish for gold, as the opportunity cost of holding the non-yielding metal will increase.
