Spot gold pared its intraday gains, and the price of gold is now around $1,979 an ounce. Gold prices are likely to see increased volatility in the week ahead due to U.S. debt ceiling talks, Fed minutes and key U.S. economic data.
Gold prices climbed more than 1 percent on Friday, spurred by dovish comments from Federal Reserve Chairman Jerome Powell. Powell said on Friday that stress in the banking sector could mean rates don’t have to be as high to keep inflation in check.
Traders slashed bets on another rate hike after Powell’s speech. Spot gold closed at US$1,977.54/oz last Friday, a sharp increase of US$19.99 or 1.02%, and the highest intraday hit was US$1,984.22/oz.
Despite the strong rebound in gold prices last Friday, spot gold still fell sharply last week by $32.69, or 1.63%, the largest weekly drop since February.
The following three important factors may affect the trend of the gold market this week:
US debt ceiling talks
The US debt ceiling turmoil remains a hot topic and continues to affect global market sentiment.
To be clear, the market is not pricing in a US default, with traders seeing less than a 10% chance of that happening. Recent reports suggest that U.S. President Joe Biden and McCarthy, a top Republican in Congress, are moving closer to a deal.
If there is a breakthrough in the talks, gold prices could fall further as a jump in risk appetite and a potential boost in the U.S. dollar pull prices towards the $1,900 an ounce level.
Any hiccups in debt-ceiling talks, or further delays that narrow the chances of a deal, could prompt investors to return to the safe-haven gold. A wave of risk aversion and dollar weakness could push gold prices above the psychological level of $2,000 an ounce.
Fed Minutes and Fed Official Speeches
The minutes of the Fed’s most recent policy meeting and speeches from Fed officials may provide more clues about the central bank’s next move.
After raising interest rates by 25 basis points in May, the Fed signaled a possible pause in rate hikes. The minutes could give us more insight into policymakers’ thinking and how united they are on the idea of a peak rate at 5.25%.
If the minutes were generally dovish, it could reinforce expectations that the Fed is done raising rates and the next step is a rate cut. However, disagreement among participants could leave room for future rate hikes, especially if economic data justifies it. It might also be wise to keep an eye on what Fed officials say in the first half of the week.
Gold bulls may fight back if the Fed minutes look dovish, while cautious Fed officials will also support a stronger gold price.
Any hawkish comments or further rate hikes mentioned in the minutes could weigh on gold prices, with a hawkish speech from a Fed official “putting salt in the wound”.
US April PCE Inflation Report
Investors will be keeping a close eye on the Fed’s favored measure of inflation, the core personal consumption expenditures (PCE) price index, especially after the central bank emphasized that upcoming data will influence monetary policy decisions.
The market expects that the US PCE report in April will show that the overall price rose by 0.3% month-on-month, after an increase of 0.1% in March; while the core PCE price index is expected to rise by 0.3% month-on-month, the same increase as in March. The core PCE price index is expected to rise 4.5% year-on-year in April, down from 4.6% in March.
Ultimately, more signs of cooling inflationary pressures could bolster the Fed’s argument for a rate cut later this year. Traders are now pricing in a 95 percent chance of a quarter-point rate cut at the Fed’s November meeting, according to fed funds futures.
Gold Technical Analysis
Should gold break below $1,970/oz and sustain weakness below this level, this could open the way to $1,945/oz and $1,900/oz.
On the other hand, if the bulls can fight back and pull the price back above the psychological level of $2000/oz, gold prices may test $2032/oz and $2045/oz.
While the technicals favor further losses, the fundamentals could easily give gold bulls a lifeline.
