Oil rallies, gold pares losses

Oil rises on strong US inflation

Crude prices pushed higher after the US inflation report and ECB policy decision.  The inflation report was hotter-than-expected but the key takeaway was another month of surging used car prices cemented the view that this driving season will probably be stronger than expected.  Commodity prices should remain elevated on Fed support as this inflation report still supports the idea that inflation will be transitory.  Stimulus will remain strong in Europe as the ECB accelerates its pandemic purchases and is not ready to talk about exit its PEPP program.

WTI crude is once again above the USD70 level and if bullish momentum remains, traders could turn overly bullish and target the mid-USD70s and eventually the highs set in 2018.

Gold

Gold whipsawed after a very hot US CPI sent Treasury yields higher.  Once investors digested the inflation report, they quickly concluded inflation will still likely be transitory and that it doesn’t change the longer-term narrative for Fed policy.  The risks of persistent continue to dwindle despite hotter-than-expected inflation readings.  Price hikes are sticky so financial markets need to be careful and not expect consumer giants to roll them back.  For now, gold will probably see more inflows from the stimulus trade and broad rally with risky assets and less from inflation hedges.

Gold has recovered most of its losses following the hot, but still likely transitory US inflation report, improving jobless claims and a dovish ECB that showed its pandemic purchases will stay at higher levels throughout the third quarter.  Gold bulls will likely have to wait till the June 16^th FOMC decision to get further confirmation that they are playing the waiting game over substantial progress in the labor market and inflation data, and will not show any hints over tapering.

Gold should consolidate around the USD1,900 level leading up to next week’s FOMC decision.

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