Dollar slides, gold gains as investors eye trade landscape

Dovish Waller and cooling inflation expectations

The US dollar slid against most of its major counterparts on Friday, and it is extending its pullback today, perhaps due to dovish remarks by Fed Governor Waller and a further slide in the University of Michigan (UoM) inflation expectations.

On Friday, Fed Governor Christopher Waller said that he will support an interest rate cut at the upcoming meeting, scheduled for next week, given that data is suggesting that the labor market is “on the edge” and as there are no signs that inflation expectations are on the rise. Indeed, according to the UoM consumer sentiment survey, the 1-year inflation expectations index further retreated to 4.4% from 5.0%, which may be the reason behind the improvement in consumer sentiment.

Waller is rumored to be one of Trump’s favorite candidates for replacing Fed Chair Powell, and that’s maybe why his comments are being closely monitored by the markets. When asked about the Fed’s top spot, Waller noted that he would accept the job if asked by the President, but so far Trump has not contacted him about the matter.

Having said all that though, the probability for a July rate cut remained very low, while a quarter-point reduction is now fully priced in even for September. Specifically, there is only a 5% chance of a July cut, while a move in September is 65% priced in.  This may be because, although cooling significantly, the 1-year inflation expectations rate remains at more than double the Fed’s 2% objective.

Clock ticking to August 1 tariff day

Investors are also keeping their gaze locked on developments regarding the trade negotiations ahead of Trump’s August 1 deadline. Even though US Commerce Secretary Howard Lutnick said that he remains optimistic about finding common ground with the EU, there are concerns that many of the tariff rates Trump announced last week may kick in and result in deeper economic wounds.

Maybe that’s why the dollar was unable to attract safe haven flows towards the end of last week and today. With the upside risks of inflation showing signs of subsiding, investors may turn their attention to potential tariff-related consequences on growth. And we’ve seen in the past that worries about growth are negative for the dollar, prompting investors to seek safety elsewhere, like in gold. Indeed, gold is benefiting today, trying to push above the key resistance zone of $3,370.

Wall Street at new record highs, PM Ishiba's party loses election in Japan

Wall Street closed mixed on Friday, after both the S&P 500 and the Nasdaq 100 hit fresh record highs. Having said that though, stock futures are pointing to a positive open today, which means that there may be hope for trade deals before August 1. A strong start to the earnings season is also helping indices to stay in uptrend modes.

Over in Japan, Prime Minister Ishiba’s coalition lost the majority in the Upper House, and he will now have to govern with minority support in both parliamentary chambers. The yen opened with a positive gap today, perhaps as traders liquidated some of their short yen positions, but the currency came quickly under pressure again. With opposition parties seeking tax cuts and a looser monetary policy, the strengthening of their position is a negative variable for the yen. That said, it is worth mentioning that, according to the Japanese Overnight Index Swaps (OIS) market, investors are still seeing a slightly more than 50% chance of another quarter-point hike by the BoJ before year-end.