Gold Price Forecast: XAU Steady as US Debt Ceiling Deadlock Persists

Highlights

• Gold prices stable amid U.S. debt ceiling deadlock and Fed minutes.
• U.S. dollar near two-month high, increasing safe-haven demand.
• Investors cautious as debt ceiling negotiations continue, affecting interest rates.

Overview

On Wednesday, gold prices remained within a narrow range as traders evaluated the ongoing deadlock over the U.S. debt ceiling. They were also focused on the minutes from the Federal Reserve’s recent policy meeting, seeking guidance on future interest rates. Despite a stronger U.S. Dollar, the market was trending upward, mainly due to a decrease in Treasury yields.

At 11:58 GMT, the price of gold (XAU) was $1982.02, showing an increase of $6.89 or +0.35%. On Tuesday, the SPDR Gold Shares ETF (GLD) settled at $183.44, up $0.23 or +0.13%.

Strong Dollar Amid Debt Ceiling Talks

The U.S. dollar maintained its position near a two-month high on Wednesday due to safe-haven demand, as negotiations to raise the U.S. debt ceiling continued without any immediate resolution in sight. Treasury Secretary Janet Yellen has warned that by June 1, the federal government might not have enough funds to meet all its obligations, increasing the risk of a damaging default.

Investor Cautious Amid Debt Ceiling Impasse

Investors were mostly avoiding riskier investments following another round of unsuccessful talks between the White House and the Republicans regarding the borrowing limit. Meanwhile, U.S. Treasury yields were slightly lower on Wednesday as investors closely monitored the debt ceiling negotiations and awaited economic data that could offer insights into the Federal Reserve’s monetary policy plans.

Debt-ceiling talks between U.S. President Joe Biden’s representatives and congressional Republicans concluded on Tuesday without a resolution, bringing the deadline for raising the government’s borrowing limit closer. The focus going forward remains on the impasse over the debt ceiling and the Federal Reserve’s plans for interest rate hikes.

Fed’s Inconsistent Signals Pose Risks for Gold

The Federal Reserve’s statements have been inconsistent, but it seems clear that the Fed is indicating that a pause in rate increases does not mark the end of the tightening cycle. Therefore, there is still a risk of rate hikes depending on how the data unfolds. Increasing interest rates raise the opportunity cost of holding gold, which does not generate interest.

The minutes of the Federal Reserve’s May 2-3 meeting, where the central bank raised its benchmark overnight interest rate by a quarter of a percentage point to the 5%-5.25% range, are expected to be released later in the day. According to the CME FedWatch tool, the market is currently pricing in a 71.5% chance of the Fed maintaining rates at its June 13-14 policy meeting.

If the market concludes that rate hikes might resume or rates could remain at their peak without any cuts for the remainder of the year, it would negatively impact gold.

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 breakinto $1923.06 (S2).