Hot PCE Lifts Dollar; Gold Holds Below $4,000

Market Wrap-up: Hot PCE Keeps Dollar Firm as Oil Climbs on Iran Risk

The inflation data that markets had been waiting for was released yesterday and broadly matched market expectations, allowing the US Dollar Index (DXY) to remain firmly anchored around 101.50.

Headline PCE inflation accelerated to 4.1% YoY in May from 3.3% in April, marking the first reading above 4% in three years, largely driven by higher energy prices following the escalation of Middle East tensions.

Meanwhile, Core PCE, the Federal Reserve's preferred inflation gauge, climbed to 3.4% YoY, its highest level since October 2023. The data reinforced expectations that the Fed could continue raising interest rates later this year.

Following the release, markets priced in a 63.4% probability of a Fed rate hike at the September 15-16 meeting. Bank of America (BofA) previously argued that persistent inflation, combined with Chairman Kevin Warsh's hawkish stance, could force the Federal Reserve to deliver as many as three rate hikes this year.

Gold remained under pressure. Although the precious metal briefly recovered toward the $4,040 area during the previous session, it failed to sustain gains and slipped back below the $4,000 level during Friday's Asian session.

In the energy market, oil prices climbed more than 2% after the United States stated that Iran was responsible for an attack on a cargo vessel near Dahit, Oman. A US official added that whether the incident violated the Memorandum of Understanding (MOU) between the US and Iran would depend on the White House's assessment.

Persistently elevated inflation together with renewed geopolitical tensions continued to support safe-haven demand for the US Dollar, putting pressure on most other asset classes. Technology stocks also came under heavy selling pressure, with Apple falling 6%, Alphabet losing nearly 1%, Meta Platforms declining more than 2%, and Microsoft dropping 3.5%.

Looking ahead, markets will focus on the University of Michigan Revised Consumer Sentiment and Inflation Expectations. Additional attention will also be on the Goods Trade Balance, Preliminary Wholesale Inventories, and remarks from Minneapolis Federal Reserve President Neel Kashkari.

XAU/USD: Gold Falls Below $4,000 as Fed Rate Hike Bets Grow

Key takeaway:

Gold retreated below $4,000 as rising expectations for additional Fed tightening and safe-haven demand for the US Dollar outweighed inflation-hedging demand.

Chicago Fed President Austan Goolsbee stated that underlying inflation pressures remain too elevated and continue moving in the wrong direction.

Meanwhile, New York Fed President John Williams pushed back expectations for inflation returning to the Fed's 2% target, noting that price pressures remain uncomfortably high despite the possibility of moderation later this year.

Although gold is traditionally viewed as an inflation hedge, a higher interest rate environment reduces its appeal as investors shift toward yield-bearing assets such as government bonds.

Technical Outlook:

Daily Bias: Bullish

Support: 3,964

Resistance: 4,100

WTI: Oil Rises Over 2% After Iran Cargo Ship Attack

Key takeaway:

WTI crude rebounded sharply during the June 25 session after Iran attacked a cargo vessel near the Strait of Hormuz, raising concerns that renewed Middle East tensions could threaten global energy supply.

A US official confirmed to MS Now that Iran was responsible for the attack on a cargo vessel near Dahit, Oman. The official stated that whether the incident breached the Memorandum of Understanding (MOU) between the US and Iran would ultimately depend on the White House's assessment.

Citi maintains that its base-case scenario remains one of easing geopolitical tensions and forecasts Brent crude could decline to $60-65 per barrel over the next 6-12 months as shipping traffic through the Strait of Hormuz returns to normal.

Technical Outlook:

Daily Bias: Bearish

Support: 69.00

Resistance: 72.85

DXY: Dollar Holds Near Highs After Strong US PCE Data

Key takeaway:

The US Dollar continued to draw support from rising expectations that the Federal Reserve will raise interest rates again. According to the CME FedWatch Tool, markets have priced in a 63.4% probability of a Fed rate hike at the September 15-16 meeting.

The Fed's preferred inflation gauge, Core PCE, accelerated to 3.4% YoY from 3.3%, marking the highest annual core inflation reading since October 2023.

Analysts also warned that persistent services inflation is unlikely to ease quickly, even if energy prices moderate.

Technical Outlook:

Daily Bias: Bearish

Support: 100.12

Resistance: 101.60

EUR/USD: Euro Near 13 Month Low as Dollar Strengthens

Key takeaway:

The euro weakened toward a fresh 13-month low as stronger US PCE inflation reinforced US Dollar strength.

Dovish comments from European Central Bank policymakers continued to pressure the single currency.

Although the ECB raised its deposit rate by 25 basis points to 2.25% at its June policy meeting, ECB President Christine Lagarde stated on Monday that the central bank does not need to respond aggressively to spillover effects from the Middle East conflict.

Technical Outlook:

Daily Bias: Neutral

Support: 1.13242

Resistance: 1.13882

USD/JPY: Japanese Yen Holds Near 40 Year High After Tokyo CPI

Key takeaway:

The Japanese Yen traded near its weakest level against the US Dollar in four decades following the latest Tokyo CPI data, while intervention risks continued to rise.

Japan's Statistics Bureau reported that Tokyo CPI accelerated to 1.7% YoY in June from 1.4% previously.

Meanwhile, core inflation, excluding fresh food and energy, increased to 1.9% YoY, up from 1.6% in the previous month.

The report suggests that inflationary pressures in Japan continue to build as producers pass higher imported energy costs on to consumers, reinforcing market expectations that the Bank of Japan will deliver another interest rate hike.

Technical Outlook:

Daily Bias: Bearish

Support: 161.28

Resistance: 161.80

Markets continue to be driven primarily by the repricing of Federal Reserve policy expectations following another upside surprise in US inflation. Stronger PCE data has reinforced demand for the US Dollar, keeping pressure on gold, the euro, and the Japanese yen.

At the same time, renewed geopolitical tensions in the Middle East have lifted oil prices, adding to concerns that higher energy costs could keep inflation elevated for longer.

Equities, particularly technology stocks, remain under pressure as higher rate expectations weigh on valuations.

Attention now turns to the University of Michigan inflation expectations, US trade and inventory data, and comments from Neel Kashkari for further clues on the Fed's policy outlook.

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