US Dollar Down, Gold Up As Trump Warns Russia And Syria

Global financial markets are seeing a fresh wave of volatility entering Wednesday as trade tensions between China and the US have lingered, while the prospect of US military action against Syria have ratcheted higher. US President Trump took to Twitter this morning to warn Russia of incoming airstrikes on Syria for the Assad regime’s suspected use of chemical weapons, resulting in a clear downshift in risk appetite.

The US Dollar (via the DXY Index) is working on its fourth consecutive down day following the March US Nonfarm Payrolls report on Friday, with rate hike expectations for four hikes this year falling below 25%, per Fed funds futures. Two data releases that would otherwise grab market participants’ attention could easily be lost in the fray of an active newswire this morning.

Incoming US inflation data for March will show that both measures of the US Consumer Price Index are now above the Federal Reserve’s medium-term target of +2%. Headline CPI is due in at +2.4% from +2.1%, and Core CPI is due in at +2.1% from +1.8% (y/y). Both of these readings would suggest that inflation is above expected rates of growth for the US, with the Atlanta Fed GDPNow Q1’18 growth forecast in at +2.0% – representing a policy conundrum that Fed officials will note be pleased with (and almost certainly USD-negative).

Given the backdrop of China-US trade tensions festering, coupled with developments around Russia and Syria, as well the prospect of a June hike already priced-in (above 75% still per Fed funds), it would seem that the March US CPI release, as well as the March FOMC minutes, will only have a limited impact on markets.

The clear winner this morning from rising tensions around the world has been Gold, which is now working on its fourth consecutive day in the black. As discussed last week, Gold’s fundamental and technical backdrop remains bullish; today’s events only serve to further the narrative. To this end, greater volatility in equity markets should serve to benefit the Japanese Yen.