FOMC Governor Adriana Kugler mentioned that the Federal Reserve should keep interest rates steady for now because tariffs are starting to affect consumer prices. Maintaining a strict monetary policy is essential to keep inflation expectations in check. Inflation is currently above the 2% target. June’s PCE inflation was estimated at 2.5%, with core inflation at 2.8%, both higher than in May. The Consumer Price Index shows that inflation is rising across various core goods while the labor market remains strong and stable.

Understanding Inflation And Interest Rates

Inflation is the rise in prices of a typical set of goods and services. Core inflation excludes unstable items like food and fuel. When inflation goes above 2%, central banks usually raise interest rates, which affects the value of the currency. Higher inflation can strengthen the national currency by increasing interest rates and attracting global investment. While Gold was once a preferred investment during inflation, higher interest rates make it less appealing since the cost of holding it increases. Lower inflation is better for Gold investments as it corresponds with decreasing interest rates, making Gold a more attractive option. Given the governor’s recent comments, we expect the Federal Reserve to keep interest rates unchanged in the next few weeks. Market expectations have adapted to this, with the CME FedWatch Tool currently showing a less than 10% chance of a rate cut in September 2024. This indicates that traders should brace for a long period of strict monetary policy. The steady and strong labor market also decreases the need for any changes in policy. For example, the June jobs report revealed an increase of 206,000 jobs, maintaining a historically low unemployment rate of 4.1%. This job growth allows policymakers to concentrate on addressing the rising inflation highlighted in the latest Consumer Price Index.

Implications For Currencies And Commodities

As a result, we expect the US dollar to remain strong against other major currencies. The US Dollar Index (DXY) has been trading near its highest levels since April, recently exceeding 106. Traders dealing in derivatives might explore strategies that capitalize on sustained dollar strength, such as buying long USD call options or selling puts on pairs like EUR/USD. In the short term, the outlook for precious metals appears negative. The cost of holding non-yielding assets like gold climbs with higher interest rates, which has pushed its price down from the record level of over $2,400 per ounce set in May. Typically, periods of tight monetary policy limit significant gains in gold prices. The uncertainty about when policies will change and how tariffs will affect prices creates a volatile environment. We suggest that traders consider using options to mitigate risk or take advantage of price fluctuations. Strategies like straddles or strangles might be effective for capturing potential volatility in equity indices or currencies without betting on a specific direction. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now