Gold experienced a significant rebound, erasing losses after softer-than-expected US inflation data eased expectations of an imminent Federal Reserve interest rate hike. Spot gold gained about 1.6% to $4,063.78 per ounce by 1:30 p.m. EDT, after touching a two-week low of $3,983 earlier. The Consumer Price Index (CPI) fell 0.4% month-over-month in June, well below the forecast of a 0.1% decline, and the annual inflation rate eased to 3.5% from 4.2%. Core CPI, excluding volatile food and energy prices, was flat in June, missing expectations for a 0.2% increase, with the annual core rate slowing to 2.6% from 2.9%.
The subdued inflation report led to a sharp reduction in anticipated Fed rate hikes. The probability of a July hike dropped to 16% from 40% according to the CME FedWatch Tool, and the odds of a September rate increase eased to 60% from 74%. Traders also exited bets on a rate hike at the July 28-29 meeting. Fed Chair Kevin Warsh reiterated the central bank's commitment to its 2% inflation goal during his congressional testimony, stating it's not the time for the Fed to "pass the buck" on inflation.
Despite the cooling inflation data and its positive impact on gold, escalating geopolitical tensions in the Middle East are introducing inflationary pressures. West Texas Intermediate (WTI) crude oil surged nearly 12% this week, trading around $80.00 a barrel, after the US carried out strikes against Iran for a third consecutive night. President Donald Trump also announced the reinstatement of a naval blockade on Iran, effective Tuesday at 20:00 GMT, with a potential 20% security fee for other countries using the Strait of Hormuz.
Analysts like Tai Wong noted that while the soft CPI should reduce rate hike expectations, the resumption of hostilities with Iran will likely drive headline inflation higher this month. This could temper gold's rally, potentially limiting it to around $4,200 in the coming sessions. Higher oil prices and the prospect of renewed inflation keep the possibility of a Fed rate hike alive later in the year, thus constraining a stronger recovery for gold. The US dollar also fell 0.6%, making dollar-priced bullion more affordable for international buyers.
Other precious metals also saw gains, with spot silver rising 2% to $59.83 per ounce, platinum adding 1.6% to $1,607.79 per ounce, and palladium climbing 4.8% to $1,307.30. US stock markets also rallied, regaining a third of Monday's 0.8% drop on the S&P 500 index. Government bond prices rallied, pushing down the annual yield on 10-year US Treasury debt by one-tenth of a percentage point from a one-month high of 4.64%.
