Financial markets have responded positively

The Federal Reserve’s primary inflation indicator, the Personal Consumption Expenditure (PCE) index, remains persistently high. Both personal income and consumer spending have exceeded projections, indicating sustained inflationary pressures. This development implies that Federal Reserve policymakers are likely to continue their hawkish stance, as current inflation metrics suggest that achieving the 2 percent target is unattainable in the near to medium-term and may take longer than anticipated. The lack of further easing in inflationary conditions will keep decision makers vigilant for potential interest rate increases unless downward pressure on prices materializes. Furthermore, US core inflation levels are significantly elevated, showing no indications of lessening. The inflation outlook remains elevated and above the Fed’s desirable levels. Nevertheless, there are indications that inflation may decelerate in the forthcoming months, attributed to a reduction in tensions in the Middle East, which has led to a decline in oil prices. Additionally, issues related to trade tariffs, which previously posed significant challenges and contributed to inflation prior to the Gulf conflict, are expected to subside, provided that trade tensions do not reignite. In a related development, oil prices experienced a notable decrease following the signing of a 60-day Memorandum of Understanding (MoU) between the United States and Iran, which has alleviated the geopolitical crisis. Financial markets have responded positively to the reopening of the Strait of Hormuz, resulting in a reduction of oil prices to pre-conflict levels. This reaction is indicative of the unwinding of the geopolitical risk premium, which may also contribute to alleviating headline inflation. However, market participants recognize that an overnight resolution is unlikely; it will require significant time for oil prices to stabilize and rebound if the peace process proceeds without interruptions. More importantly, the parties involved in the conflict have yet to achieve a permanent resolution, and the risk of escalation is always present. In another context, following UK’s Keir Starmer’s resignation, nominations for the upcoming leadership contest are scheduled from July 9 to July 15. Currently, Andy Burnham has emerged as a frontrunner. Should no additional candidates enter the race, he could assume office on July 17. A critical consideration in this scenario pertains to the identity of the next Chancellor of the Exchequer. Initially, the British Pound Sterling and Gilts saw a decline but later recovered. The United Kingdom’s economy continues to grapple with challenges related to slow growth stemming from geopolitical factors and substantial debt. In this environment, addressing borrowing and spending presents significant difficulties for the new Chancellor, especially concerning infrastructure improvement and increased defence funding requirements. This raises the question of whether the new Chancellor will pursue a progressive tax policy or reconsider tax benefits extended to high income earners as a means to balance the government’s budget. Consequently, both the British Pound and Gilts are likely to remain vulnerable until further clarity emerges. Furthermore, any shifts in the new leadership’s approach will be consequential for the Bank of England’s (BoE) monetary policy decisions, particularly following last week’s 7-2 vote to maintain the status quo. Market expectations this year foresee no alterations in interest rates, and any increase in borrowing and spending may exert additional inflationary pressure. Gold market analysis In the previous week, gold prices showed substantial volatility, trading within a broader range. Although there were multiple attempts to push prices higher, persistent selling pressure ultimately resulted in a decline, as market participants exhibited reluctance to hold gold positions in the absence of significant institutional involvement. Analysts and traders are attributing the recent downturn in gold prices to a halt in US interest rate cuts, compounded by rising inflationary pressures, which may force further interest rate increases. It is essential to recognise that, in recent years, global central banks have emerged as primary purchasers of gold, with both investors and financial institutions closely following their buying behaviour. The geopolitical tensions in the Gulf region, coupled with elevated oil prices, have significantly altered the market landscape. The appreciation of the US dollar can be attributed to reduced supply, necessitating increased funding to address debt obligations and higher import costs faced by non-oil procuring countries. Additionally, oil producing nations are struggling with funding shortages resulting from declining export levels, further worsened by the continued blockade in the Strait of Hormuz. Sources indicate that normal operations have restarted. It is crucial for the market to acknowledge that individual investors do not possess greater influence than central banks. The value of global gold reserves held by central banks surpasses $4 trillion. (Valuations fluctuate with the gold price). Economists and bank analysts primarily serve as forecasters, drawing conclusions based on accessible news and data. In contrast, central bankers, who manage portfolios of gold and other assets, are the foremost market influencers capable of dictating future price trajectories, owing to their unmatched scale and demand. Moreover, it is important to note that both Iran and Russia have functioned as significant buyers of physical gold, typically in exchange for their oil sales. This dynamic is often not openly discussed due to imposed sanctions, although recent developments have alleviated some restrictions on their ability to sell in international markets. Currently, it appears that other participants in the gold market are primarily reacting to the central bank’s initiatives, suggesting that future price increases may be mainly driven by central bank buying. However, one should not anticipate explicit announcements from China regarding its gold purchases, as the country generally functions quietly, without drawing much attention. China’s strategic approach in global financial markets is unlikely to change, as it remains acutely aware of associated risks and pricing dynamics. Consequently, unless geopolitical tensions, particularly between the US and Iran, escalate to critical levels, it is probable that gold prices will continue to encounter selling pressure during periods of price appreciation. Therefore, in these situations, the demand from investors will only lead to a temporary increase in gold prices, driven by a short-term shortage during purchasing or reduced selling interest. However, this won’t alter the overall trend unless central banks intervene to purchase gold. As a result, in the next two quarters, gold will face significant obstacles in surpassing $4390 or $4470 to hit $4620. Meanwhile, if it falls below $3910, the likelihood of reaching $3740 or $3650 will increase. WEEKLY OUTLOOK – Jun 29-July 03 #GOLD @ $4089- This week, for gold to reach $4270, it needs to climb above $4188. Conversely, if it drops below $3992, the likelihood of testing $3920 or lower will increase. Gold is expected to trade within a broader range. #EURO 1. 1384- Euro faces resistance at 1. 1488. A breakthrough at this level would suggest a climb to 1. 1540. Conversely, a decline beneath 1. 1305, although less probable, could lead to a dip down to 1. 1270. #GBP @ 1. 3203- Pound Sterling needs to remain above 1. 3102. If it surpasses the 1. 3295 level, it may move towards 1. 3340. Otherwise, it could drop to 1. 3050. #JPY @ 161. 76- A rise above 160 is motivating the dollar bulls to challenge the Bank of Japan’s commitment to defending its currency. USD still has the potential to rise, but it must surpass 162. 50 to reach 163. 90. However, it is important to monitor 160. 20, as a breakthrough there could lead to risks for 158. 50. Copyright Business Recorder, 2026

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