Trump’s Fed Pick and Secondary Tariffs on the Minds of Investors

With Fed Governor Adriana Kugler stepping down, Trump has an early opportunity to inject a stronger dose of dovishness to the Fed Board (albeit that Kugler herself was far from a policy hawk) with his yet-to-be named replacement for the vacant seat. So, between Trump’s ability to shape the Fed into a body which is more prone to cutting rates, and the bleak-looking jobs data last week, barring any inflationary spikes it looks like US interest rate cuts could start flowing more freely come September.

Where could a potential inflationary spike come from? Oil springs to mind, with the US President threatening 100% secondary tariffs on countries purchasing of Russian oil. If this threat becomes a reality, it appears that whether Russian oil is no longer bought, or if it continues to be bought but with 100% tariffs then applied, the outcome would likely be an inflationary one in both scenarios. Which could then impact the ability of the Fed to lower interest rates if CPI jumps higher due to energy prices. Albeit that the direct inflationary effect on the US economy may be less pronounced in the scenario where 100% secondary tariffs are applied, compared to Russian oil supply effectively being removed from the global energy market.

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With Trump insisting on lower U.S. interest rates but threatening 100% secondary tariffs on Russian oil buyers, which has the potential to send inflation north, the U.S. President essentially wants to have his cake and eat it too. It is difficult to achieve lower interest rates while taking action which could raise energy prices and inflation. We now wait to see if these threats are acted upon or if the US President has second thoughts on the matter.

In terms of the energy market, oil prices have not shown much reaction to the secondary tariff threats on buyers of Russian oil, with the focus for now on OPEC+ decision to hike production again next month. US crude had been trading up at around $70 at the end of July but the price now languishes near the $65 level. However, if secondary tariffs on buyers of Russian oil come into effect, we could see a squeeze higher in the price (depending on what specifics may be announced and how buyers of Russian oil react).

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Dropping US yields following the disheartening US jobs figures last week has served the gold price well. Increasing odds that we could see a September FOMC rate cut have taken the heat out of US treasury yields and gold has been able to pounce, with the precious metal now back to within shouting distance of the $3400 level. Trump’s wielding out of tariff levels (such as the 39% levied against Switzerland and his rhetoric and tariffs against India) have also raised the uncertainty stakes which has worked in gold’s favour. Levels to watch include $3400 which shapes as both a technical and psychological resistance, after which is another resistance point at $3418. Support arrives at $3360 and $3338.

In FX, the USD is looking more vulnerable than was the case during July (when the Dollar Index rallied 3.4%) after the lacklustre jobs data and with a September Fed rate cut looking more likely as a result. However, struggles by the Swiss Franc (due to US tariff threats of 39%) and the British Pound (ahead of an expected rate cut by the Bank of England on Thursday this week) are helping to limit the overall damage to the USD (as measured by the Dollar Index which is trading at 98.70 at the time of writing, ahead of support at 98.35 and below resistance at 99.10).

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