Gold Price Forecast: Dollar’s Rise Dampens XAU’s Appeal, Debt Ceiling Negotiations in Focus

Highlights

• Gold prices stagnant as dollar strengthens.
• Debt ceiling negotiations impact gold’s attractiveness.
• Rising U.S. Treasury yields contribute to gold’s decline.

Overview

Gold prices were relatively unchanged on Thursday as the dollar strengthened, diminishing the appeal of the dollar-denominated metal. Market participants were eagerly awaiting updates on the protracted debt ceiling negotiations in Washington, adding to the cautious sentiment.

At 09:17 GMT, Gold (XAU) is trading $1961.34, up $1.50 or +0.08%. On Wednesday, the SPDR Gold Shares ETF (GLD) settled at $181.98, down $1.45 or -0.79%.

Key Fundamental Events

The rise in the value of the safe-haven U.S. dollar, reaching its highest level since mid-March, contributed to a decline in gold’s attractiveness for international buyers. While gold had shown signs of recovery following a previous sell-off, the persistent strength of the dollar and increased U.S. Treasury yields imposed limitations, outweighing the usual demand for safe-haven assets associated with the U.S. debt ceiling concerns.

Fitch Ratings added further pressure on gold prices by placing a negative rating watch on the United States’ AAA rating. The agency cited risks related to the ongoing debt ceiling negotiations, raising concerns that the government might fail to meet certain payment obligations. However, Fitch remained optimistic about a resolution being reached before the X-date.

Additionally, higher Treasury yields influenced gold’s decline. U.S. Treasurys experienced an upward trend as investors analyzed the potential implications of the ongoing debt ceiling negotiations and the uncertain outlook for interest rates. Progress in the negotiations on Wednesday raised hopes for a resolution before the June 1 deadline, which Treasury Secretary Janet Yellen emphasized as crucial to avoid severe economic consequences.

Investors also assessed the minutes from the Federal Reserve’s latest meeting, which revealed a division among officials regarding interest rate policy. This indicated that further rate increases remained a possibility, dispelling the assumption that rate hikes were entirely off the table ahead of the central bank’s June policy meeting. Divergent views among Fed speakers in recent weeks have reflected varying opinions on whether inflation has sufficiently eased to warrant a pause or end to rate increases, or if additional hikes are necessary.

Upcoming Reports

Investors eagerly awaited U.S. GDP estimates and initial jobless claims scheduled for release at 1230 GMT. These reports were expected to provide valuable insights into the health of the economy. Furthermore, pending home sales data for April would be released, with economists polled by Dow Jones anticipating a rise of 0.8% compared to the previous month’s decline of 5.2%.

Short-Term Forecast

Given the prevailing strength of the U.S. dollar, the ongoing debt ceiling negotiations, and the uncertain interest rate outlook, the short-term forecast for gold remains somewhat cautious. Investors will closely monitor the developments in Washington and the upcoming economic reports for further guidance on market conditions.

Technical Analysis

Gold (XAU) is trading on the bearish side of the pivot at $2002.54, putting it in a weak position. The market is currently hovering just above a key level at $1956.30 (S1).

Look for counter-trend buying on the first test of $1956.30 (S1). If this move creates enough upside momentum then we could see a retest of $2002.54 over the near-term.

A failure to hold $1956.30 (S1) will indicate the selling pressure is getting stronger. The could extend the break into $1923.06 (S2).

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