- The FOMC has started discussing rate hikes.
- Gold is under pressure amid Russia’s bullion sales.
The US dollar retreated as the odds of a year-end rate hike slipped from 57% to 52%, which was reflected in lower Treasury yields. Separately, equities were buoyed by NVIDIA’s first-quarter results and the SpaceX IPO filing.
The minutes of the April FOMC meeting showed that most officials are ready to raise rates if inflation persistently runs above 2%. At the same time, the overwhelming majority believe that bringing PCE back to target will take longer than previously assumed.
As a rule, a Fed pivot toward discussing rate hikes pushes Treasury yields higher and strengthens the dollar. This time, it played out differently, as markets saw that the central bank does not intend to ignore inflation. Nevertheless, over the medium term, expectations of a fed funds rate hike remain a bullish factor for the US currency.
The drop in Treasury yields was helped along by the largest Brent sell-off in two weeks, triggered by Donald Trump’s remarks. The President stated that the US is in the final stage of negotiations with Iran. However, the blockade of the Strait of Hormuz is accelerating the drawdown of global oil inventories. According to Goldman Sachs, in May, they are falling by 8.7 million b/d — twice as fast as at the start of the Middle East conflict.
If there is no progress toward a peaceful settlement, Brent will resume its rally, which would play into the dollar’s hands — especially in the event of further geopolitical escalation. Iran has vowed to respond harshly to any resumption of US military action, including by bombing countries beyond the Middle East.
The dollar’s retreat and falling Treasury yields allowed gold to find its footing. Even so, interest in the precious metal is being eroded by the highest yields in key sovereign bond markets since 2008.
Gold was also weighed down by news that Russia had sold gold, bringing its reserves to 73.9 million ounces — a four-year low.
