By Tim Waterer, Chief Market Analyst of KCM Trade & Forbes Advisor Australia Advisory Board Member
July’s relatively tame headline US inflation data should be enough to pave the way for a Fed rate cut in September, with CPI continuing to behave rather than running away as had been foreboded. Headline CPI landed at 2.7%, in-line with June’s result and below the 2.8% forecast, although core CPI did come in marginally higher at 3.1%. The key takeaway from the data is that inflationary fears stemming from Trump’s sharp tariff policy have not yet manifested in the CPI numbers.
And the Fed’s dual mandate (inflation and the labour market) means it cannot afford to sit on its hands for too long considering the poor jobs data for the last three months (where the average monthly jobs growth has been only 35k during that span). So, while this latest inflation data keeps the Fed on track for a rate cut next month, there is still the potential for the August CPI figures to throw a spanner in the works ahead of the September Fed meeting should there be any upside surprises.
With the mild CPI result heightening the chances of an imminent US rate cut next month, the USD found itself under further pressure. The Dollar Index (DXY), which had been making a charge towards the 100 level at the end of July, has now slipped back to the 98 level on growing anticipation of lower US interest rates by the end of the year.
The fall in the USD enabled a moderate bounce in the gold price with the precious metal oscillating around the $3350 level ahead of the Trump- Putin meeting on Friday. The prospect of the two leaders striking some form of agreement which ceases hostilities is acting as an immediate cap to the upside on the gold price (because in such a scenario safe haven demand could abate). However, if the meeting between the US and Russian leaders in Alaska this week doesn’t resolve anything and the war in Ukraine continues, gold could be making a push back towards $3400 once again. Levels to watch include moderate support at $3320 followed by sterner support at $3294, while on the upside, resistance around $3380 is the most notable barrier ahead of $3400.
Oil prices are also subject to whatever the outcome of the Trump-Putin meeting happens to be. Oil has been facing downside pressure on expectations that the two leaders could strike a deal which involves the lifting of Russian sanctions. This could potentially add a couple of million barrels of Russian oil to the market per day, and it could also see the removal of secondary sanctions on buyers of Russian oil such as India. But if the meeting fails flat in terms of ending the Russia-Ukraine conflict and lifting Russian sanctions, oil could rebound higher with risk-premium re-entering the equation for the energy markets.
Financial markets will be zeroed-in on the Trump-Putin meeting this week, given the economic consequences which could hinge on whether a deal is struck. Global energy prices and by extension, inflation outlooks may rest upon the fate of existing Russian sanctions (including secondary sanctions on buyers of Russian oil) beyond the Alaska meeting.
Risk assets have already been delivered a dose of good news this week with the US-China tariff pause extended (for another 90-days), and another shot of market optimism could arrive if the Trump-Putin meeting bears fruit regarding a possible end to the Russia-Ukraine conflict.
Ongoing complexities in the conflict such as territorial disputes do leave large scope for financial markets to be left disappointed if the much-hyped meeting fizzles out without a resolution. And whether Ukraine is attending the meeting or accepts any deal is another matter. Though Trump will be aware that if he leaves Alaska empty-handed as far as a peace deal or at least a path to one, then the optics may not look great for the US President. Suffice to say, all eyes on Alaska this week...