Gold Price Forecast: XAU Traders Eyeing Debt Ceiling Deal, Fed Policy

Highlights

• U.S. debt ceiling agreement causes uncertainty for gold prices.
• Concerns over higher interest rates negatively affect gold demand.
• Gold market impacted by inflation data, anticipation of interest rate hike.

Overview

Gold (XAU) prices are experiencing a mixed trading session on Monday. This is due to a recently reached agreement to temporarily suspend the U.S. debt ceiling, which has caused some uncertainty. Additionally, concerns about higher interest rates for an extended period of time are negatively impacting the demand for gold, which does not generate any interest or yield. It’s worth noting that the U.S. market is closed today for Memorial Day, so trading activity is expected to be relatively low.

At 02:44 GMT, Gold (XAU) is trading $1944.72, up $4.115 or +0.21%. On Friday, the SPDR Gold Shares ETF (GLD) settled at $180.90, up $0.70 or +0.39%.

Debt Ceiling Deal Reached, Awaits Congressional Approval

U.S. President Joe Biden and House Speaker Kevin McCarthy have reached a final agreement on suspending the $31.4 trillion debt ceiling until January 1, 2025. The deal is now set to go to Congress for a vote.

With only a few days left before a potential government default, both leaders are working to secure enough votes from Republicans and Democrats to pass the measure. The agreement aims to gather support from the political center, as lawmakers rush to vote before the June 5 deadline to prevent a harmful federal default.

President Biden expressed relief at the agreement, emphasizing that it avoids the worst-case scenario of a default. He called on Congress to come together and pass the bipartisan agreement swiftly.

The compromise includes spending cuts, which may face scrutiny from some lawmakers. However, both Biden and McCarthy expressed confidence that the plan will be successful. The coming days will determine whether Washington can once again narrowly avoid a default or if the global economy will face a potential crisis.

Gold Prices Capped by Rising Inflation, Rate Hike Expectations

Gold prices plummeted to a two-month low on Friday due to higher-than-expected U.S. inflation data. The report revealed robust growth in consumer spending for April, indicating a stronger economic outlook for the second quarter.

This news contributed to inflationary pressures and raised concerns about the possibility of prolonged high interest rates. The Personal Consumption Expenditures (PCE) price index, a key inflation measure monitored by the Federal Reserve, saw a 4.4% increase in the 12-month period leading up to April, following a 4.2% rise in March. The unexpected inflation data had a negative impact on the gold market.

The latest data from the CME FedWatch tool indicates a 64.2% probability of a 25-basis-point interest rate increase by the U.S. central bank in June, with expectations of rates remaining steady for the rest of the year. Traders are anticipating the 11th consecutive rate hike by the Federal Reserve in June.

The 10-year Treasury yields and the dollar index have also remained high. As interest rates continue to rise, gold becomes less appealing to investors due to its lack of yield.

Technical Analysis

Gold (XAU) is trading on the bearish side of $1956.30 (S1), putting it in a weak position.

Overcoming $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).

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