US February Inflation Data and Market Recovery

Markets are set to rebound on Tuesday after Trump signals the war in Iran might end soon, and traders wonder how it will affect inflation and the trajectory of Fed monetary policy.

The Key Developments

• Markets recover after Trump signals a possibility for de-escalation in Iran and reopening crude shipments.
• The drop in crude prices eases fears of a sharp rise in inflation that would force central banks to hike rates, allowing gold prices to move higher.
• The US February CPI is expected to remain unchanged and above target, keeping the Fed on hold until at least July.

Markets Bottom and Gold Rises

US President Donald Trump riled up markets on Monday after crude prices shot up at the start of the week, suggesting that the war in Iran might be over soon. Gold prices rebounded along with Asian equities, and the market erased the hawkish views on monetary policy that had built up over the weekend. Bullion topped $5,200 an ounce in early Tuesday trading as the odds of the ECB and BOE hiking this year returned to around zero, and the dollar fell as some safe-haven flows unwound. Crude prices, which had jumped to nearly $120 at the start of the week, fell back to $85 and are now trading around $90 amid major speculative whiplash. The initial fear was that high energy costs would push through to consumer prices, forcing central banks to raise rates and weigh on the economy.

Inflation remains the main concern ahead of next week's plethora of central bank meetings, with traders paying particular attention to the Fed's views. Inflation in the US was already above target, but was coming down before the outbreak of the war. Before the conflict started, the US inflation outlook was relatively steady, with expectations that the FOMC's next move would be a rate cut. Friday's disappointing NFP read was entirely overshadowed by the largest interruption in oil production in history. But it's this underperformance in the labour market that justifies any upcoming rate cut as long as inflation remains elevated. If the upcoming consumer price readings come in lower, the market could price in a more dovish Fed, particularly if there are more signs that the war in Iran could wind down or, crucially, if shipments of crude resume through the Strait of Hormuz. Trump said the war was ahead of the three-to-four-week schedule he gave last week, but didn't see it ending in the next seven days. However, markets could become nervous again quickly, given the uncertainty about US objectives and whether Iran will agree to end the threat to oil production.

Steady Inflation Amid Market Chaos

Wednesday is the release of February CPI figures, which are projected to show continued stickiness that could keep the Fed on hold for a while. The headline CPI is expected to remain unchanged at 2.4%, while the core rate, which excludes volatile components such as energy and food prices, is expected to remain at 2.5%. On Friday, the Fed's preferred inflation metric, the Core PCE price index, is released, but it was delayed from January due to the government shutdown. It is also expected to remain unchanged at 3.0%. Despite fluctuations in energy markets, the odds of a Fed rate cut have remained relatively stable but have turned slightly more hawkish after Iran struck at Gulf oil production facilities. Markets are not expecting a rate cut until July, and the odds have narrowed to around 50-50 from around 60-40 a week ago. Meanwhile, gold prices were fluctuating in the opposite direction of a safe-haven asset, as the war in Iran was expected to push up inflation and hurt gold prices in the short term. However, Trump’s comments reversed early losses, and gold closed Monday in the green.

Gold Bounces Away from $5k Support

Gold prices moved away from the $5,000 psychological mark, which has temporarily reduced the odds of a breakdown towards the lower VWAP at $4,880. However, this week’s CPI and PCE data, alongside further easing of tensions, might shift focus back to the volume-weighted support. On the upside, and as the VWAP lines flatten out and price action tightens overall, the peak is at $5,380, a level at which the RSI might enter the overbought region if the dollar weakens further. Meanwhile, immediate resistance lies at $5,200, with support at the middle VWAP line at $5,130.

Source: SpreadEx | Gold, Daily Chart