Weekly Gold Review: Gold prices see biggest drop in three and a half months as debt ceiling standoff delivers a double win for the dollar

Spot gold this week hit its lowest point since April 3 at $1951.88 an ounce, down about 2.3% for the week, and is poised to record its biggest weekly decline since the week of February 3. This is due to the expectation of a US debt ceiling deal to avoid a potential default, and multiple data releases this week showing strength in the US economy, leading traders to reduce bets on Fed rate cuts and supporting the dollar. The dollar also benefited from its safe-haven status amid the risk of a US debt default. The dollar index rose for a second consecutive week, up over 0.6%, and hit a new high since March 20 at 103.625. Debt ceiling negotiations progress positively US President Biden and House Speaker McCarthy emphasized their determination to reach a deal as soon as possible to raise the federal government's $31.4 trillion debt ceiling to avoid a debt default that would have catastrophic economic consequences. McCarthy said he expects to introduce a bill to raise the debt ceiling in the House next week, noting that negotiations are better than last week. This helped ease concerns about a US debt default, leading the market to revise expectations for the likely direction of US interest rates. But even if Biden and McCarthy reach a deal as early as Sunday (May 21), Congress may struggle to get enough votes to pass it before June. The US Treasury said that if the $31.4 trillion debt ceiling is not raised, it is expected to be unable to pay government bills by June 1. The Congressional Budget Office previously warned that if the government's $31.4 trillion debt ceiling is not raised, the US will face a "significant risk" of defaulting on payment obligations in the first two weeks of June. Wall Street banks and asset management companies have begun preparing for the consequences of a potential default. Michael Gregory, deputy chief economist at BMO Capital Markets, said: "No matter how you slice it, the US faces a difficult choice in restoring fiscal order. However...if the US approaches the 'X-date' without a deal, we are more likely to see market stress indicators amplified, and the macroeconomic consequences of a short-term default will be more severe." Ilya Spivak, head of global macro at Tastylive, said the market anticipated a positive outcome to the debt ceiling negotiations, as recent comments have centered on the progress made, and gold is falling as US Treasury yields and the dollar are rising simultaneously. Dollar receives multiple positive factors US data released this week showed an increase in single-family housing starts in April, and while the previous value was revised down, the data was generally positive; April industrial production easily exceeded expectations; and April retail sales expanded again. Data released after the Fed's May meeting showed that the US labor market remains strong and inflation has fallen only slightly. Gold bulls are clearly showing fatigue, and the market needs more signs of a shift in Fed policy, but hasn't really seen that yet. Meanwhile, some Fed officials continue to make hawkish remarks, raising the possibility of another rate hike next month, boosting the dollar. Money markets currently expect a 41.4% probability of another 25-basis-point rate hike by the Fed in June, up from just 15.5% a week ago. Traders have also lowered expectations for rate cuts later this year. Chicago Fed President Goolsbee said it's too early to talk about rate cuts, and that as much data as possible needs to be obtained to decide whether to pause at the June meeting, continue raising rates, or cut rates. Atlanta Fed President Bostic said that even if the unemployment rate starts to rise later this year, policymakers need to remain "super strong" in fighting inflation. New York Fed President Williams noted that the US economy is beginning to see supply and demand return to balance, and inflation is moving in the right direction, but remains at an "unacceptable" high level. Cleveland Fed President Mester said that given persistent inflation, she doesn't believe the Fed is yet at the point where it can keep interest rates stable for a period of time. Richmond Fed President Barkin said he doesn't believe inflation is steadily falling to the Fed's 2% target, and he's open to pausing rate hikes or further rate hikes at the next meeting. Minneapolis Fed President Kashkari said the central bank may have more work to do. Michael Gapen, chief US economist at Bank of America, said: "Inflation is currently more than double the Fed's target, and unemployment is below the natural rate level estimated by all FOMC participants. These facts alone suggest that the Fed's bias will be towards raising rates rather than cutting them. In our view, the Fed will not object to a mild recession, seeing it as an acceptable cost to bring inflation back down to target." Joe Capurso, strategist at Commonwealth Bank of Australia, said: "We expect the dollar to rise further modestly as the market continues to lower rate cut expectations. The Fed could continue to raise rates this year, although the threshold is high." Helen Given, a foreign exchange trader at Monex USA in Washington, said: "Several factors have boosted the dollar recently, including progress in debt ceiling negotiations, stronger-than-expected US economic data, and hawkish comments from some Fed officials." Viraj Patel, global macro strategist at Vanda Research, said: "In the short term, the debt ceiling issue is a win-win for the dollar. If things get worse, you'll see a global hard landing, and you'll want to hold dollars. And if the problem is solved, people will change their expectations of the Fed, and we may see the Fed raise rates again." Joe Manimbo, senior market analyst at Convera in Washington, said: "Regardless of the progress, debt ceiling negotiations seem to be positive for the dollar. On the one hand, continued deadlock tends to give the dollar a safe-haven boost; on the other hand, any constructive tone in the negotiations will add to the dollar's popularity." Further tightening of sanctions against Russia A US official said ahead of the G7 summit in Japan that the G7 will announce new sanctions and export controls targeting Russia's war in Ukraine, aimed at disrupting Russia's access to materials needed for the battlefield, closing loopholes used to evade sanctions, further reducing international reliance on Russian energy, and narrowing Russia's access to the international financial system. While allies have not yet agreed to adopt a broader, stricter approach, US officials expect G7 members to adopt an assumption in the most militarily sensitive areas for Russia that exports are prohibited unless on a designated list. Although the market is currently focused on US debt ceiling negotiations, if the G7 forces Russia into deeper trouble, Russia's countermeasures to Western pressure could further worsen market sentiment, which could limit the downside of gold. Giovanni Staunovo, an analyst at UBS, said: "Some market participants still seem to expect the Fed to raise rates again, which is putting pressure on gold. But we still expect gold prices to rise over the next 12 months, and expect them to reach $2200 an ounce." Spot gold is expected to rebound to $1975 before resuming its decline On the daily chart, gold is expected to rebound to $1975 before resuming its decline. $1975 is the 100% target of the downward wave iii from $2022. Support below is seen at the 161.8% target of wave iii at $1945. Wave iii is a sub-wave of the downward wave (c) from $2048. The 123.6% target of wave (c) is at $1946.

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