Gold Recovers as Dollar and Bond Yields Retreat; Markets Await US Inflation Test

Spot gold rose approximately 0.24% from the previous close to around $4,181.60 per ounce. The weaker dollar, lower oil prices and declining bond yields supported gold. Lower bond yields reduce the opportunity cost of holding gold, making the precious metal more attractive to investors.

However, inflation figures above expectations could revive the possibility of interest-rate increases and weaken this support.

Oil: Expectations of Higher Supply Counter Risks to Exports

Oil prices retreated after Monday’s surge. Reuters and The Wall Street Journal identified the prospect of increased Russian diesel supplies as a factor easing concerns about fuel shortages. However, damage to Russian refineries has cast doubt on whether those additional supplies can materialize as promised.

Meanwhile, Saudi Arabia has announced plans to increase the export capacity of its pipeline network. Temporarily converting a gas pipeline could increase oil transportation capacity by 1.2 million barrels per day within seven to eight weeks. The plan matters for the outlook for exports, but the additional capacity has not yet translated into actual oil supplies reaching the market and has so far had only a temporary effect on prices.

The Dollar and Foreign Exchange Markets

The US Dollar Index fell approximately 0.24% on Tuesday to 102.33, retreating from the 18-month high it reached on Monday. Safe-haven demand and concerns about the Middle East had supported the dollar’s gains on Monday. Lower oil prices and renewed attention to the interest-rate outlook shifted its direction on Tuesday.

The euro rose approximately 0.24% to $1.11818, although concerns over France’s debt and budget outlook continue to weigh on its prospects.

In its analysis published on Tuesday, ING said markets had almost fully priced in a European Central Bank rate hike in December, leaving limited room for further support for the euro from that prospect.

The bank lowered its EUR/USD forecast for the fourth quarter of 2026 and the first quarter of 2027 to 1.13. It also continued to identify a possible test of the 1.11 level in the short term.

ING also expects EUR/GBP to trade within a range of 0.84 to 0.85 over the coming months. France’s difficulties and the possibility of further UK interest-rate increases are factors supporting the pound.

However, the bank considers market expectations for the scale of rate increases in 2027 to be excessive. The UK budget on October 28 is another risk on the horizon, although ING does not currently expect it to have a lasting negative effect on the pound.

Japan: October Rate Hike Pause Becomes More Likely

According to Bloomberg, Bank of Japan officials are reluctant to raise interest rates at two consecutive meetings and are therefore likely to pause at their October 30 meeting.

Policymakers want to assess the effects of September’s rate increase before making another move. A further increase in December remains possible, however, and the final decision has not yet been made.

Concerns Over US Equities

US cash markets had not yet opened on Tuesday. On Monday, the S&P 500 closed down 0.06% at 7,807.24, while the Nasdaq Composite fell 0.44% to 27,245.90.

Reports of progress by Chinese company CXMT have heightened concerns about competition and pressure on the profits of US chipmakers. Selling pressure has also spread to Asian markets, as investors worry that heavy investment in artificial intelligence may fail to generate sufficient returns in an environment of elevated interest rates.

Treasury Yields and the Federal Reserve

The US Treasury market has followed two different paths over the past week. Between October 6 and October 13, the yield on one-month Treasury bills rose from 3.943% to 4.042%, an increase of 9.9 basis points. Yields on three-month, six-month and one-year securities also increased by 3.9, 4.4 and 2.1 basis points, respectively.

From the two-year maturity onward, however, yields declined. The two-year Treasury yield fell 2.8 basis points to 4.77%, while the three-year yield dropped 3.2 basis points to 4.892%. The declines were greater for five-year and seven-year Treasuries, at 5.8 and 7.2 basis points, respectively.

The largest pullbacks occurred in longer-dated bonds. The 10-year Treasury yield fell 9.2 basis points to 5.194%, the 20-year yield declined 10 basis points to 5.602%, and the 30-year yield dropped 10.3 basis points to 5.558%.

As a result, the spread between the 10-year and two-year Treasury yields narrowed from 48.8 to 42.4 basis points, indicating a flattening of the yield curve.

In Tuesday’s trading, The Wall Street Journal identified lower oil prices and declines in AI-related stocks as factors boosting demand for Treasuries and pushing yields down.

Reuters, citing Saxo Bank, reported that elevated yields in recent weeks had attracted buyers back into the bond market. However, persistent inflation, high oil prices and heavy government borrowing continue to stand in the way of a sustained recovery.

Wednesday’s inflation report will be an important test of whether the decline in yields can continue.

FedWatch puts the probability of the Federal Reserve holding rates steady at its October 28 meeting at 80.6%, compared with a 19.4% probability of a rate increase. The probability of a hike is 1.6 percentage points lower than on Monday.

What Are Markets Waiting For?

Earnings reports from major banks on Tuesday and the US Consumer Price Index (CPI) report on Wednesday are the most important tests ahead.

On Thursday, markets will receive the Producer Price Index (PPI), retail sales figures and oil inventory data. On Friday, remarks by Kevin Warsh could provide further clarity on how investors interpret the outlook for monetary policy.