Gold prices stretched losses on Tuesday hovering near two-month lows as rising optimism over a potential U.S. debt ceiling deal and expectations of further interest rate hikes by the Federal Reserve boosted demand for the USD.
Interest Rates Outlook Dampens Gold Demand
Prices of the yellow metal fell from the record highs reached earlier this month following a series of hawkish signals by Federal Reserve officials, causing investors to turn to the dollar. Also, despite the uncertainty surrounding a U.S. debt default and deteriorating risk sentiment, gold did not see significant buying activity as investors flew into the safe haven greenback.
Gold XAUUSD steadied below $2000 per ounce, close to its lowest level since March at $1944. Gold is affected by changes in interest rates. When interest rates increase, people may prefer to invest in assets that offer a return rather than non-interest-bearing gold. Check Gold Outlook 2023 for further insights on the yellow metal’s expected performance this year.
USD Steadies Above 104
During early European trading on Tuesday, the U.S. dollar maintained its position near a two-month high. This was due to traders assessing the probability of additional interest rate hikes by the Federal Reserve and the passage of the U.S. debt ceiling deal through the Congress.
An initial agreement was made over the weekend on the debt ceiling. President Joe Biden and House Speaker Kevin McCarthy came to a tentative agreement to suspend the $31.4 trillion debt limit till 2025 and limiting federal spending in order to avoid a potential default. Both expressed their optimism that the agreement will be backed by Democrats and Republicans.
The deal must be passed quickly through a narrowly divided Congress before the U.S. Treasury runs out of funds to fulfill its obligations. However, it is likely to encounter opposition from both extreme factions of the political parties.
Despite the closure of the U.S. and U.K. markets on Monday, the dollar remained strong and is expected to have a monthly increase of approximately 2.5% as traders prepare for the possibility of the U.S. keeping interest rates high for an extended period.
The US Dollar Index (DXY) was nearly flat at 104.30, the highest since March, bolstered by stronger-than-expected economic data increased the possibility of further Fed rate hikes.
Recent data revealed on Friday showed that PCE inflation in the US, the Federal Reserve’s favored measure of inflation, increased higher than anticipated in April. Additionally, consumer spending and durable goods orders surpassed expectations, suggesting that the U.S. economy continues to perform very well despite the aggressive rate hikes since last year.
The likelihood of the Fed increasing the interest rate by 25 basis points in June is now higher according to market projections. This is a shift from earlier predictions of a pause in the tightening cycle.
This week, we will be paying close attention to the nonfarm payroll data for May to gain insight into how much the Fed might increase interest rates based on the U.S. economic indicators. The monthly U.S. employment report will be released on Friday, days ahead of the Fed’s meeting. It is anticipated that 191,000 jobs were created in May, indicating that the job market in the United States is still strong.
If the jobs market appears to be improving, the likelihood of a rate hike in June will be intensified. According to Fed Fund futures prices, there is currently a greater than 60% chance that the Fed will raise rates by 25 basis points at its upcoming meeting.
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