COMMODITIES: Crude Falls Amid US-Iran Optimism, Gold, Copper Rebound

• Gold has traded in a relatively tight range for much of today, with the yellow metal holding close to yesterday’s record high amid continued tariff uncertainty.
• Spot gold is currently up by 0.5% at $3,228/oz, less than $20 below Monday’s all-time high of $3,245.7.
• Goldman Sachs expects gold to rally to $3,700 by the end of this year and $4,000 by mid-2026, while UBS sees it reaching $3,500 by year-end, supported by continued central bank demand, recession risks and trade and geopolitical uncertainties.
• From a technical perspective, the trend condition in gold remains bullish, with sights on $3,291.8 next, a Fibonacci projection.
• Meanwhile, crude has held relatively steady through the day as the market weighs global oil demand risks.
• Both OPEC and the IEA have cut their demand forecasts, while sentiment that Europe will reach a deal with the US on tariffs has weakened. Ongoing discussions between the US and Iran adds further uncertainty.
• WTI May 25 is down by 0.4% at $61.3/bbl.
• A bearish theme in WTI futures remains intact and recent weakness has resulted in the breach of a number of important support levels, reinforcing a bearish threat.
• A resumption of the bear cycle would open $54.26, a Fibonacci projection. Initial firm resistance is seen at $64.85, the Mar 5 low and a recent breakout level.

• On top of this euro appreciation, financial conditions have tightened as equities have tumbled since President Trump’s “Liberation Day” tariff announcements and 5Y5Y inflation swaps have fully reversed the 15bp push higher seen on the defence and infra spending plans.
• Whilst there has been some tariff reprieve for the European Union with Trump’s 90-day ‘pause’ at a reciprocal rate of 10% rather than 20%, the huge 145% tariffs imposed by the US on China has further bolstered the risk that “a re-routing of exports into the euro area from countries with overcapacity would put downward pressure on inflation.”
• Our policy team has been closely following this amongst other areas - see MNI: Europe to Sharpen Trade Tools To Tackle Dumping (Feb 24) and MNI: EU To Keep China Option In Reserve As Seeks US Deal (Apr 11).
• The combination sees terminal rate expectations close to cycle lows heading into the meeting, roughly consistent with a policy rate bottoming out below 1.6%.
• It should also see the Governing Council hawks having a little less sway in this meeting’s communications but would also make any hawkish skew more notable.

The below is taken from the MNI ECB Preview [see the full report here]

• Inflation risks were two-sided amidst heightened uncertainty and might continue to be viewed as such although one potential upside risk has clearly not materialised: a weaker euro.
• The March statement noted “A general escalation in trade tensions could see the euro depreciate and import costs rise” but the euro has instead seen another leg higher after appreciating in early March on defence and infra spending announcements.
• EUR/USD has surged closer to 2022 highs whilst the euro on a trade-weighted basis is at highs since the creation of the single currency (although much less historically elevated in real terms with its lower historical inflation than many of its trading partners).
• Note the rare disconnect with rate differentials.