Gold Price Forecast: Weaker as Debt Ceiling Negotiations, Rate Hike Fears Mount

Highlights

• Gold prices face decline due to debt ceiling talks and rate hike concerns.
• U.S. economic data and Fed rate hike expectations put pressure on gold.
• China’s factory contraction adds to gold price limitations.

Overview

Gold prices are in a position to post a loss this month due to developments in the U.S. debt ceiling negotiations and the likelihood of the Federal Reserve increasing interest rates. These factors strengthened the U.S. dollar and reduced gold’s appeal as a safe investment.

Legislation proposed by President Joe Biden and House Speaker Kevin McCarthy to raise the debt ceiling to $31.4 trillion and implement new spending cuts cleared an important stage, moving forward to the full House of Representatives for discussion and an anticipated vote on Wednesday.

At 06:00 GMT, Gold (XAU) is trading $1963.42, up $4.77 or +0.24%. On Tuesday, the SPDR Gold Shares ETF (GLD) settled at $182.05, up $1.13 or +0.63%. The market has lost 1.5% so far this month.

Support and Yesterday’s Price Action

Gold prices managed to find support at the $1,956.30 level, benefiting from a decline in Treasury yields. However, recent intermittent bounces have been short-lived, suggesting the possibility of a similar outcome this time. Gold prices have retreated from their near-record highs reached earlier in May.

Fed and Interest Rates

On Tuesday, gold rebounded from initial losses as the dollar weakened and Treasury yields declined, driven by optimistic market sentiment regarding the U.S. debt ceiling deal. The lower dollar made gold more affordable for holders of other currencies, while 10-year Treasury yields hit a one-week low. Additionally, some fund managers were seen closing out their short positions and taking profits, contributing to the positive momentum. In the short term, gold prices may continue to drift sideways or face downward pressure until a new catalyst emerges.

The recent strong U.S. economic data, which exceeded expectations, has led to discussions about further tightening of monetary policy by the Federal Reserve to curb inflation. While concerns about the U.S. debt deal initially supported gold prices, the repricing of the Fed’s rate hike expectations has put pressure on gold. Gold, being a zero-yield asset, tends to lose appeal in a high-interest rate environment.

Debt Ceiling and Congress

Traders now believe that the Fed is more likely to raise interest rates next month instead of keeping them unchanged, partly due to the expectation that the debt deal will mitigate some economic risks that could have kept the central bank on hold. The debt deal will face its first test in Congress, with President Joe Biden and Republican Kevin McCarthy expecting sufficient votes to pass it into law. The strength of the U.S. dollar index has offset some of the support provided by the decline in the benchmark 10-year Treasury yield.

Impact on Gold Prices

With the market anticipating higher interest rates, the appeal of gold, which offers no yield, is dulled. Until there is a reversal in rate expectations, the upside potential for gold prices may remain limited. Furthermore, China, one of the largest consumers of gold, experienced a faster-than-expected contraction in factory activity in May, which adds pressure on policymakers to support the country’s uneven economic recovery.

Technical Analysis

Gold (XAU) is trading on the bullish side of $1956.30 (S1), indicating the return of buyers.

A sustained move over $1956.30 (S1) will indicate the counter-trend buying is getting stronger. If this creates enough near-term momentum then look for a surge into the PIVOT at $2002.54.

A sustained move under $1956.30 (S1), however, could extend the selling into $1923.06 (S2). Aggressive counter-trend buyers could come in on the first test of this level, but if it fails, then look for the selling to possibly lead to a near-term test at $1876.81 (S3).

For a look at all of today’s economic events, check out our economic calendar.