FX.co ★ Gold weakens as USD strengthens

Gold is falling against the backdrop of the strengthening US dollar. One would expect even further decline, but prolonged negotiations on the US debt limit and a more relaxed rhetoric from the Federal Reserve System are very opportune for the precious metal as a safe-haven asset.

By the time of writing, gold futures on COMEX fell by 0.48% to $1,970 per ounce.

Over the past week, this actively traded contract lost 2% in value. Notably, on May 4th, gold prices reached a record high of $2,085.

At the end of last week, the dollar rose by 0.55%, and the week before, it added 1.53%. Throughout most of April, the American currency remained in consolidation near annual lows, but in May, it finally demonstrated an upward reversal. The previous week, the USDX closed near the highest level since mid-March, at the 103 mark.

Optimistic signals about the US economy and a series of hawkish comments from Federal Reserve officials favor the dollar rise. These factors have led to active growth in the dollar index over the past week, and this growth has continued for the second consecutive week.

Today, USDX quotes were slightly decreasing, although they still remained at a high level. At the time of writing, the dollar index decreased by 0.01% but still traded at a relatively high level of 103.18.

As known, such a level of the dollar's value makes gold more expensive for holders of other currencies and, consequently, reduces demand for the precious metal and ultimately its price.

According to the Federal Reserve, inflation in the United States still remains too high to pause the rate hike process. So, there is little doubt that the regulator intends to continue raising interest rates. In turn, higher interest rates diminish the attractiveness of gold, which does not yield guaranteed income.

By the way, market quotes already reflect an 87.3% probability that the Federal Reserve will leave the interest rate unchanged in June according to the FedWatch data.

However, the concerns that hover over the global market due to the US debt limit paradoxically provide significant support to gold prices. The precious metal price more depends on the news about debt ceiling negotiations rather than the upcoming interest rate dynamics. After all, a default on the national debt looms heavily over the world's largest economy and could materialize even before the next Fed meeting.

On Monday, President Joe Biden and Speaker of the House Kevin McCarthy will have a meeting that is expected to somehow resolve the uncertainty regarding the US debt. There is hope that the parties will still be able to reach an agreement after negotiations were abruptly halted on Friday.

Republicans seem to have proposed reducing overall spending but increasing defense spending. When Donald Trump was the President of the United States, Republicans in Congress voted three times to raise the debt ceiling without any preconditions such as budget cuts.

The Congressional Budget Office has already warned of the high risk of a US debt default in the first two weeks of June. To prevent this from happening, lawmakers need to reach an agreement on increasing the borrowing limit as soon as possible. The International Monetary Fund has already stated that a default would have very serious consequences for both the United States and the rest of the world.

As for gold, it needs to reach the 5-week exponential moving average (EMA) this week, which is currently at $1,990. After that, it will be able to rise towards the resistance zone around the Bollinger Bands' middle line on the daily timeframe, at $2,005.