GOLD Seeks Recovery as USD Weakens Before Fed Speech-Fundamental

19 May 2023

Gold Shows Signs of Recovery as USD Weakens Before Fed Speech

The price of gold is making a recovery attempt, moving higher towards the $1,970 level as the US Dollar weakens ahead of a speech by Federal Reserve Chairman Jerome Powell. Investors are anticipating a neutral policy guidance from Powell, while end-of-the-week flows are also expected to impact gold price movements.

Despite renewed optimism surrounding a potential US debt ceiling deal, as indicated by US President Joe Biden and House Speaker Kevin McCarthy, the US Dollar continued its upward trend for the third consecutive day on Thursday. A debt ceiling agreement would prevent a default and potential recession in the US, providing relief to the market. This has resulted in sustained strength for the US Dollar, supported by the rise in US Treasury bond yields. Consequently, the price of gold faced significant selling pressure, breaking key support levels and testing the psychological level of $1,950, reaching six-week lows.

The US Dollar rally was further supported by positive data, including upbeat weekly Jobless Claims figures, which showed a decrease of 22,000 to 242,000 in the week ending May 13, marking the largest drop since 2021. Continuing claims also declined to 1.8 million in the week ending May 6. Additionally, hawkish comments from several Federal Reserve policymakers, such as Dallas Fed President Lorie Logan, Fed Governor Philip Jefferson, and St Louis Fed President James Bullard, added to the bullish sentiment surrounding the US Dollar. They emphasized that current data does not support skipping an interest rate hike in the June meeting and advocated for higher rates as a measure against inflation.

On the last trading day of the week thus far, the US Dollar is consolidating its gains, giving bulls a chance to take a breather before a potential further increase. Market sentiment remains somewhat cautious due to fresh tensions between the US and China over Taiwan. The US Trade Representative's office announced an agreement between the US and Taiwan on the first part of their "21st Century" trade initiative, covering various aspects. This development raises concerns about a scheduled visit to the US by a Chinese commerce official, weighing on investor sentiment.

Adding to the market's unease, a small but influential Republican faction has expressed intentions to block any debt ceiling agreement in the House of Representatives if it does not include substantial federal spending cuts. This dampens the optimism surrounding a potential debt ceiling deal as President Biden and McCarthy resume talks.

Looking ahead, even if risk aversion increases, the US Dollar is likely to benefit, making it challenging for gold buyers to stage a comeback. However, the gold price action will be influenced by Federal Reserve Chairman Jerome Powell's speech, updates on the US debt ceiling, and end-of-the-week flows.

From a technical perspective, there is a possibility of a rebound today within the range of the 38.2% to 61.8% Fibonacci levels, which could lead to a pullback and potentially a new downward leg in price.

19 May 2023

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