Gold traded firmer in early Asian hours on Wednesday, with XAU/USD around $4,335 after rebounding from last week’s year low following a US-Iran framework agreement aimed at ending the war. Attention has shifted to the Federal Reserve’s interest rate decision due later in the day, which is expected to set the tone for near-term pricing.
Washington and Tehran are preparing to sign an interim peace deal, with the full accord potentially published within the next two days ahead of a signing ceremony in Switzerland. Separately, the US President said on Tuesday that the Strait of Hormuz could reopen on Friday and described the agreement as a completed deal. The easing of an energy and inflation shock has fed through to rate expectations: the CME FedWatch tool shows the probability of a US rate hike in December falling to 58% from nearly 70% last week. The Fed is widely expected to keep policy unchanged in June, leaving the federal funds target range at 3.50% to 3.75%, while markets watch the press conference for signals from Kevin Warsh.
Market Dynamics Shift Amid US-Iran Peace Prospects
With the framework for a US-Iran peace deal in place, we see a significant shift in market dynamics. The subsequent drop in oil prices, with Brent crude falling below $85 a barrel for the first time this year, is easing the inflation fears that have gripped markets. This environment explains why gold is finding support around $4,335, despite the de-escalation.
All attention now shifts to the Federal Reserve’s decision later today. The market has already repriced expectations, with the probability of a December rate hike falling to 58%, as the latest CPI report for May showed inflation cooling to 2.8%. We believe this creates an opportunity, as the Fed may signal a more dovish stance than previously anticipated.
Market Strategy and Asset Outlook
Given these developments, we should consider strategies that benefit from declining market fear. With the VIX index collapsing to a two-year low around 12.5, selling volatility appears attractive. This could involve selling puts on major indices or using options to bet on continued low volatility in the coming weeks.
For gold, the narrative is shifting from a geopolitical hedge to a play on interest rates. As the Fed is now less likely to hike aggressively, non-yielding assets like gold become more attractive. We see value in buying call options to position for a further rally if the Fed confirms a dovish pivot.
This situation is reminiscent of the market reaction after the first Gulf War in 1991, which saw a sharp decline in oil prices and a subsequent equity rally. We anticipate a similar “peace dividend” for the stock market, especially for sectors that were hit hard by high energy costs. Therefore, buying call options on transportation or consumer-focused ETFs could be a prudent move.
