On Tuesday (July 14), spot gold saw a slight rebound during the Asian and European sessions. While oil prices surged, indicating some negative news had been priced in, the recent downward trend in gold prices was ultimately suppressed by real interest rates. Market pricing in monetary policy has undergone a significant correction, with the probability of a Fed rate hike in July continuing to rise, completely reversing previous expectations of easing. The yield curve trading logic has shifted entirely, ultimately creating a structural counterbalancing effect on gold prices.

The escalating geopolitical conflict between the US and Iran is reshaping the foundations of global energy and inflation pricing.

The Trump administration officially declared the US-Iran confrontation a military conflict, renewed the 60-day troop deployment right, refused to set a timetable for the end of the conflict, announced the resumption of the Iranian sea lane blockade policy, and groundbreakingly proposed a 20% security passage fee for all goods transiting the Strait of Hormuz, completely overturning the US's more than two-hundred-year-old principle of freedom of navigation. The combined effects of increased sea lane costs, uncertainty surrounding the military conflict, and supply chain disruptions have rapidly fueled market concerns about sticky, energy-driven inflation, providing core fundamental support for rising interest rates and increased expectations of rate hikes. However, the US has denied that the conflict will enter a protracted phase.

Inflation concerns are forcing interest rate repricing, leading to a systemic upward shift in real interest rates.

Geopolitical conflicts and expectations of a rebound in inflation have become the core driver of the current rise in US Treasury yields. Currently, yields on both short- and long-term US Treasuries are rising simultaneously, with the 10-year yield breaking through the 4.6% mark and the 2-year yield holding steady above 4.25%. However, due to low forward oil prices, inflation expectations remain low, leading to a sustained short-term increase in real interest rates. As the core pricing anchor for global asset classes, a continued rise in real interest rates implies an increase in the risk-free real return of the US dollar and a marginal tightening of global liquidity. Although long-term inflation expectations remain moderate and controllable, the uncertainty of short-term geopolitical inflation shocks is sufficient to support interest rates remaining high, significantly enhancing the sustainability of the high-interest-rate environment. (Chart of real interest rate trends, source: Federal Reserve)

Federal Reserve rate hike expectations have been revised sharply, and tightening pricing in July and September is heating up.

Amid geopolitical inflationary disturbances and rising real interest rates, the market's pricing in a Fed rate hike has undergone a sharp correction. The probability of a July rate hike, previously near zero, has risen steadily to nearly 40%, becoming the core trading theme in the current interest rate market. Furthermore, the September FOMC meeting has already fully priced in a 25bp rate hike, confirming that the Fed's next policy move is likely to be a rate hike, completely abandoning the previous narrative of easing and rate cuts. It's worth noting that the current market exhibits a typical structural divergence in expectations: in the short term, geopolitical inflation has fueled fears of a rate hike; however, long-term inflation expectations remain anchored in a moderate range, with the market generally pricing in room for further rate cuts even after a Fed rate hike, indicating that the overall policy cycle still favors rate cuts over rate hikes. Against this backdrop, the US Treasury yield curve has steepened simultaneously at both ends, becoming the core trading logic for the coming months. The US June inflation data to be released on Tuesday, along with Fed Chairman Warsh's statements at his congressional hearing, will be key indicators of the strength of short-term rate hike expectations. If inflation data exceeds expectations, it will further solidify expectations of a July rate hike, pushing real interest rates to continue their upward trend. (Chart of interest rate futures on CME Group, source: CME Group)

Summary and Technical Analysis:

In this round of escalating US-Iran geopolitical tensions, the core driving factors are real interest rates and expectations of interest rate hikes. As a non-interest-bearing asset, gold prices exhibit a strong negative correlation with real interest rates. The current continuously rising real interest rates and the increasing probability of a July rate hike have significantly increased the opportunity cost of holding gold. Currently, attention remains focused on whether CPI will decline and whether the slowdown in global economic growth will lead to a decline in employment. Meanwhile, the ongoing indefinite military conflict between the US and Iran will likely cause pessimistic expectations to be quickly reflected in gold prices, leading to a rebound after the negative factors have been fully priced in. Technically, gold prices have found support at the important 4000-point level. Without a rapid rebound following tonight's CPI data and the Capitol Hill inquiries, there is a risk of further weakness, continuing to price in the uncertainty of geopolitical risks. Support is at the lower channel line, and resistance is at the descending resistance line around 4043. (Spot gold daily chart, source: EasyTrade) At 17:36 Beijing time, spot gold is currently trading at $4016 per ounce.