- Trump announced reciprocal tariffs on most of the US’s trading partners.
- On Wednesday, the US increased tariffs on China to 104%.
- Market participants are awaiting the US CPI report for more clues on Fed policy.
Gold prices rallied on Wednesday as global trade tensions increased the appeal of the safe-haven metal. At the same time, a weak dollar made gold cheaper for foreign buyers, increasing demand. Further support for bullion came from an increase in Fed rate cut expectations.
Trump first announced reciprocal tariffs on most of the US’s trading partners on Wednesday last week. The immediate response was panic over a bigger global trade war. As a result, most markets sold off as investors sought the best place to put their money. At the time, safe-haven currencies including the yen and the Swiss franc benefited the most. Meanwhile, gold pulled back from its all-time highs.
However, on Wednesday, the US increased tariffs on China to 104%. The move has escalated the trade war between the two countries and could plunge the US into a recession. Trump’s move continued shaping the outlook for growth and inflation in the US. Experts are predicting a higher likelihood of a recession that will put pressure on the Fed to lower borrowing costs.
Gold (Source: Bloomberg)
Both these outcomes favor gold which has rallied this year. A weak economy means uncertainty and poor risk appetite among investors. Therefore, demand for the safe-haven gold increases. At the same time, lower borrowing costs increase the appeal of the non-yielding metal. Market participants expect the Fed to start cutting rates as soon as May.
Meanwhile, recent data from the US showed a mixed picture of the US economy. In March, there was an unexpected surge in job growth. However, the unemployment rate also jumped to 4.2%. Traders are now more focused on future data which will reflect the impact of Trump’s tariffs. A decline in the labor market will be bullish for gold as it will put pressure on the Fed to lower borrowing costs.
On Wednesday, the Fed will release its minutes of the last meeting. Market participants will look for clues on future rate cuts. During his speech on Friday, Powell maintained a cautious tone, saying policymakers needed to assess the impact of recent tariffs before making any moves.
Furthermore, market participants are awaiting the US CPI report for more clues on Fed policy. However, future inflation reports will be more relevant, reflecting recent tariff developments.
