Gold prices remained steady on Tuesday, with spot gold at $4,055.39 per ounce and US gold futures rising 0.6% to $4,055.10. This stability was primarily driven by increasing optimism that the Strait of Hormuz might reopen, which led to a notable decline in crude oil prices. West Texas Intermediate (WTI), the US oil benchmark, fell by nearly 5% to $76.09 per barrel, easing inflation concerns and subsequently lowering US Treasury yields. The US 10-year T-note, for example, collapsed by 10 basis points to 4.687%.
The reduced oil prices have significantly impacted expectations for the Federal Reserve's monetary policy. The probability of a September rate hike, as indicated by the CME FedWatch Tool, fell to 57.1% from 67.2% a day earlier, and money markets are now pricing in a 65% chance. Lower inflation risks, stemming from cheaper oil, generally reduce the pressure on central banks to raise interest rates. While gold is traditionally seen as an inflation hedge, higher interest rates tend to weigh on the non-yielding asset, making the current easing of rate hike expectations supportive for gold.
However, the situation remains fluid, with conflicting reports regarding US-Iran negotiations. US President Donald Trump stated that talks were underway and called it a "last chance" for Iran to sign a deal, while Iran denied any direct negotiations. Despite this uncertainty, the market reaction reflects a belief that a diplomatic resolution regarding the Strait of Hormuz is becoming more likely. Investors are also closely watching upcoming US labor market data, including the ADP Employment Change on Wednesday and Nonfarm Payrolls on Friday, for further clues on the Fed's policy path. Softer labor figures could further diminish rate-hike expectations and bolster gold prices.
