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Gold at over 2-mth low amid debt deal cheer, hawkish Fed outlook

Published 2023-05-29, 08:32 p/m
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Investing.com -- Gold prices fell slightly on Tuesday, sticking to more than two-month lows amid optimism over a debt ceiling deal and as expectations of more interest rate hikes by the Federal Reserve spurred flows into the dollar.

The yellow metal tumbled from record highs hit earlier this month as a string of hawkish signals from Fed officials saw investors pivot into the dollar. This also saw gold see little buying even as sentiment worsened amid uncertainty over a U.S. debt default.

But with policymakers now signaling that they had reached a tentative agreement to raise the debt ceiling and avert a potentially crippling default, gold faces even more pressure amid improved appetite for risk-driven assets. U.S. stock futures rose in late-Monday trade, as did Asian and European stock markets.

Spot gold fell 0.2% to $1,941.51 an ounce, while gold futures fell 0.2% to $1,959.50 an ounce by 20:26 ET (00:26 GMT). Both instruments were close to their lowest levels since mid-March.

Focus this week is now on more U.S. economic cues, particularly nonfarm payrolls data for May, to gauge just how much more the Fed could potentially hike rates. Data last week showed that the Personal Consumption Expenditures price index - the Fed’s preferred inflation gauge - unexpectedly rose in April, indicating that inflation remained sticky.

The trend, coupled with any signs of resilience in the jobs market, is likely to further expectations for a rate hike later in June. Fed Fund futures prices show markets are positioning for an over 60% chance the Fed will hike rates by 25 basis points in its next meeting.

The dollar traded at two-month highs on expectations of more rate hikes, while broader metal prices retreated. The prospect of higher interest rates bodes poorly for non-yielding assets such as metals, by pushing up their opportunity costs.

Industrial metals also remained under pressure as markets feared a further deterioration in economic conditions this year. Focus this week is on key manufacturing and service sector activity data from China, the world’s largest copper importer.

Copper futures fell 0.3% to $3.6707 a pound, cutting short a rebound from near seven-month lows. The red metal was hit hard by signs of a slowing post-COVID recovery in China, following a string of weak economic indicators for April.

U.S. manufacturing readings are also on tap this week.

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