U.S. markets face uncertainty as weak economic data raises Fed rate cut expectations, while President Trump's new copper tariff review adds inflation concerns. Gold retreated from record highs amid profit-taking and easing geopolitical tensions, with Ukraine reportedly agreeing to a natural resources deal with the U.S. Investors await Friday's PCE inflation data and Zelensky's U.S. visit for further direction.

Trump's Tariff Plans and Weak Data Leave Markets in Limbo

Markets have started questioning the resilience of the U.S. economy following a string of weak economic data, boosting bets that the Federal Reserve will proceed with rate cuts this year. However, on the other hand, Donald Trump is pressing ahead with new tariff measures, adding to confusion over the economic outlook and monetary policy due to concerns about inflation.

On Tuesday, President Trump signed an executive order directing the Commerce Department to review potential tariffs on copper. This move follows the recent decision to impose a 25% tariff on steel and aluminum, set to take effect in a few weeks, adding another layer to tariff measures that could reshape global supply chains in the metals sector.

The Trump administration argues that global market dumping and excess capacity have negatively impacted U.S. copper production, making the country dependent on imports for defense and other critical industries. Therefore, the planned tariff aims to revitalize the domestic copper industry.

Commerce Secretary Howard Lutnick stated that tariffs on copper imports could also extend to products containing copper, which will be part of the investigation. The department has 270 days to study copper imports and report back to Trump. However, no specific tariff rate has been mentioned yet.

Most mainstream economists continue to warn that tariffs could fuel already elevated inflation risks, fail to deliver the economic benefits Trump envisions---thus restraining economic growth---and disrupt global trade flows.

After easing by 100 basis points last year, the Fed adopted a wait-and-see approach at its January meeting, highlighting upside inflation risks and uncertainties stemming from Trump's policies. Policymakers have stated that they will not cut rates unless they see sustainable progress toward the target inflation rate, though a weakening labor market would be an exception. Still, the Fed is likely to remain cautious about rate cuts, as rates are now less restrictive.

Meanwhile, markets have increased their bets on Fed rate cuts following recent inflation data that eased concerns and weak economic reports that suggest Trump's policies are beginning to weigh on the U.S. economy.

Fed swaps now price in 56 basis points of easing by year-end---up from 48 basis points on Monday. Additionally, the first rate cut is now expected in July instead of September, while the probability of a May cut has risen to 32%.

The Personal Consumption Expenditures (PCE) Price Index, which the Fed considers as a key inflation gauge, will be released this Friday and will be crucial for rate cut expectations. According to median estimates from economists surveyed by Bloomberg, the core PCE price index---which excludes volatile food and energy costs---likely rose 2.6% year-on-year in January.

This would indicate that price pressures in the U.S. remain above the 2% target, but a slowdown from the previous 2.8% could reinforce easing concerns over accelerating inflation. This, in turn, could boost expectations of an earlier Fed rate cut and put downward pressure on the U.S. dollar.

Gold Retreats After Record Surge as Investors Weigh Global Risks

On Monday, gold surged past $2,956 per ounce, marking a new all-time high. However, during Tuesday's session, it dropped more than 2% as profit-taking and easing geopolitical risks weighed on prices.

The latest data from the U.S. alleviated inflation concerns while raising doubts about economic performance, reinforcing expectations for Fed rate cuts this year. Lower interest rates are favorable for gold, which does not yield interest.

Meanwhile, Trump continues to issue tariff threats, adding to uncertainty and supporting gold through safe-haven inflows. According to data compiled by Bloomberg, net inflows into gold-backed exchange-traded funds last week reached their highest level since 2022.

On the other hand, sources familiar with the matter reported on Tuesday that Ukraine has agreed to a deal with the U.S. to develop its natural resources. The Trump administration had previously intervened in efforts to end the Russia-Ukraine war, urging Ukraine to accept such an agreement. However, Ukrainian President Volodymyr Zelensky had rejected earlier versions of the deal, arguing that the U.S. was demanding too much from his country.

According to a source familiar with the matter, the latest agreement came after the U.S. withdrew its demand for Kyiv to commit $500 billion in payments from resource extractions. However, the deal still includes the creation of a joint fund to manage revenues from Ukraine's natural resources. Notably, it does not yet include any security guarantees.

Zelensky is expected to visit the U.S. on Friday. If a deal is reached and a ceasefire is achieved in the Russia-Ukraine war, it would lead to an easing of geopolitical risks in the region. This, combined with a slight stabilization of political turmoil following Germany's elections, could support an outflow from safe-haven assets. However, the scope of the agreement will be crucial in determining the scale of the market's reaction.