During Asian and European trading hours on Tuesday, spot gold staged a modest rebound, showing signs of a slight relief rally in the face of consecutive strong gains in oil prices. However, the recent downtrend in gold prices has been broadly constrained by rising real interest rates.
Significant revisions in market pricing for monetary policy have taken place, with the probability of a Federal Reserve rate hike in July continuing to climb. This has completely overturned previous easing expectations, leading to a full shift in the trading logic for interest rate curves and ultimately creating a structurally bearish environment for gold prices.
U.S.-Iran Geopolitical Conflict Escalates, Reshaping Global Energy and Inflation Pricing Fundamentals
The Trump administration has officially characterized the U.S.-Iran confrontation as a military conflict, renewing the authority to deploy troops for 60 days, refusing to set a timetable for the end of hostilities, announcing a restart of the policy to block Iranian shipping lanes, and innovatively proposing a 20% security transit fee for all cargo passing through the Strait of Hormuz. This move fundamentally overturns over two centuries of U.S. principles on free navigation. The combined factors of rising shipping lane costs, military conflict uncertainty, and supply chain disruptions have rapidly intensified market concerns about energy-driven sticky inflation. This provides core fundamental support for rising interest rates and heightened rate hike expectations, although the U.S. has denied that the conflict will enter a prolonged phase.
Inflation Concerns Force Interest Rate Repricing, Systemic Rise in Real Rates
Inflation rebound expectations triggered by the geopolitical conflict have become the core driver of the current rise in U.S. Treasury yields.
Currently, both short and long-term U.S. Treasury yields are moving higher, with the 10-year yield breaking above the 4.6% level and the 2-year yield holding firmly above 4.25%. However, as forward oil prices remain low, inflation expectations have stayed subdued, leading to a short-term sustained rise in real interest rates.
As the core pricing anchor for global major asset classes, the continued rise in real interest rates signifies an increase in the real risk-free return on the U.S. dollar and a marginal tightening of global liquidity.
Although long-term inflation expectations remain moderate and controllable, the uncertainty from short-term geopolitical inflation shocks is sufficient to support interest rates remaining at elevated levels, significantly enhancing the persistence of the high-interest-rate environment.
Fed Rate Hike Expectations Sharply Revised, Tightening Pricing for July and September Heats Up
Against the backdrop of geopolitical inflation disturbances and rising real rates, market pricing for Federal Reserve rate hikes has undergone a dramatic revision.
The probability of a July rate hike, which was previously nearly zero, has continued to rise and is now close to 40%, becoming the core trading theme in the current interest rate market. Simultaneously, the September policy meeting has fully priced in a 25 basis point hike, with the market confirming that the Fed's next policy move is most likely a rate hike, completely moving away from the previous narrative of easing and rate cuts.
It is noteworthy that the current market exhibits a typical structural divergence in expectations: short-term geopolitical inflation shocks have intensified fears of rate hikes; however, long-term inflation expectations remain anchored in a moderate range. The market widely prices in room for subsequent rate cuts even if the Fed implements a hike, with the overall policy cycle still expected to involve more cuts than hikes.
In this context, both ends of the U.S. Treasury yield curve have steepened simultaneously, forming the core trading logic for the coming months.
The U.S. June inflation data to be released on Tuesday and the testimony of Federal Reserve Chair Wash before Congress will serve as key guides for the strength of short-term rate hike expectations.
If the inflation data shows a stronger-than-expected rebound, it will further solidify expectations for a July hike, propelling real interest rates to continue their upward trend.
Summary and Technical Analysis
In the current market movement driven by the U.S.-Iran geopolitical escalation, the core dominant factors are real interest rates and rate hike expectations.
As a non-yielding asset, the price of gold exhibits a strong negative correlation with real interest rates. The currently rising real rates and the increasing probability of a July rate hike have significantly raised the opportunity cost of holding gold. The focus remains on whether CPI data will decline and whether a slowdown in global economic growth will lead to a deterioration in employment.
At the same time, the ongoing fermentation of an indefinite U.S.-Iran military conflict could lead to pessimistic expectations being quickly priced into gold, potentially triggering a relief rally once negative sentiment is exhausted.
From a technical perspective, the price of gold has found support after retesting the crucial 4000-point level. If it fails to stage a quick rebound in conjunction with tonight's CPI data and the Congressional testimony, there is a risk of further weakness, as the market continues to price in the uncertainty of geopolitical risks.
Support is seen at the lower channel line, while resistance lies near the descending pressure line around 4043.
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