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Gold prices slide to two-month low amid debt ceiling uncertainty and dollar strength

May 26, 2023

LONDON (May 26) Gold prices continue to experience downward pressure, hovering near two-month lows as concerns over the U.S. debt ceiling and expectations of higher interest rates drive demand for the dollar. The yellow metal is currently down approximately 2% for the week, marking its worst performance since late January. In tandem with the surge in the dollar, which reached a two-month high against a basket of currencies, spot gold (XAU/USD)fell 0.1% to $1,939.70 per ounce, while gold futures expiring in June declined 0.2% to $1,939.80 per ounce.

Investor focus remains fixated on ongoing negotiations among U.S. lawmakers regarding the debt ceiling. The uncertain outcome of these discussions has contributed to the dollar's strength, as investors seek refuge in the currency. The Federal Reserve's hawkish signals have further bolstered the dollar's position, while simultaneously dampening gold's appeal. Policymakers have signalled their intent to maintain higher U.S. interest rates for an extended period to counter persistent inflationary pressures.

According to the CME FedWatch tool, market expectations currently suggest a 50-50 chance of a 25-basis-point rate hike in June, with any rate cuts anticipated no earlier than September. The labor market's signs of strength have also reinforced the outlook for higher U.S. interest rates, as weekly jobless claims continue to rise.

In addition to these factors, concerns surrounding a potential global economic slowdown, including the looming possibility of a U.S. default and a potential recession in Germany, have failed to boost safe-haven demand for gold. The precious metal, known for its status as a non-yielding asset, tends to lose its allure in environments characterised by high-interest rates.

The dollar's ascent to its highest level since mid-March has further diminished gold's attractiveness for overseas buyers. Additionally, benchmark Treasury yields remain near the levels observed on March 13, further diverting investment away from gold.

As the market awaits further developments on the U.S. debt ceiling and monitors central bank policies, gold prices are likely to remain under pressure.


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