GOLD Rebounds, Targets Short Continuation Amid Concerns

26. Mai 2023

Gold rebounds further from a two-month low, reclaiming the $1,950 level during the early European session and breaking a two-day losing streak.

The Gold price is benefiting from a slight weakness in the US Dollar (USD) as traders take profits following its recent surge to a two-month high. However, significant upside for Gold remains elusive, at least for now, as expectations of the Federal Reserve (Fed) maintaining higher interest rates to combat inflation could act as a headwind for the precious metal. The market is already pricing in the possibility of another 25 basis points (bps) increase at the upcoming Federal Open Market Committee (FOMC) policy meeting in June.

These expectations were fueled by hawkish comments from several Fed officials and better-than-expected economic data from the United States (US) released on Thursday. The revised estimate of the Gross Domestic Product (GDP) report showed a 1.3% annualized expansion in the economy for the January-March quarter, surpassing the initial estimate of 1.1%. Additionally, a surprise drop in Initial Weekly Jobless Claims indicated strength in the US labor market, providing the Fed with room to continue raising rates.

Attention is now focused on the US Personal Consumption Expenditures (PCE) Price Index, which will influence expectations of future rate hikes and impact the USD. The yield on the two-year US government bond, sensitive to interest rate changes, has reached a two-and-a-half-month high due to hawkish Fed expectations. This may discourage aggressive bullish bets on Gold before the release of the PCE Price Index during the North American session.

Furthermore, concerns about a global economic slowdown and the US debt ceiling are supporting the safe-haven appeal of Gold amid a generally softer tone in equity markets. Negotiations between Democrats and Republicans to raise the US government's borrowing limit have shown little progress, and credit rating agencies like Fitch and DBRS Morningstar have expressed concerns, potentially dampening investor appetite for riskier assets.

Our idea is to anticipate a continuation of the short-term downward momentum trend, with a potential pullback and retest at the previous 50% to 61.8% Fibonacci area. This area coincides with the previous neckline resistance from the double top breakout and could prompt a price decline for a short-term continuation.

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The Gold Price (XAU/USD) has seen a recovery to consolidate its monthly losses, the first in three months, amidst mixed concerns surrounding the extension of the US debt limit. The corrective bounce is gaining strength due to holidays observed in major markets, including the US, and market anxiety ahead of the upcoming US Nonfarm Payrolls (NFP) report.

However, the approval of a deal to prevent a US debt payment default is not unanimously supported by some Republicans and Democrats. This suggests the possibility of a political drama surrounding the passage of this crucial agreement to avert a looming default by June 5. Such uncertainties are prompting buyers in the Gold Price market.

Furthermore, the Gold price faces challenges from the optimistic outlook on the US Federal Reserve (Fed) policy, supported by positive US economic data and hawkish comments made by Fed policymakers. Similar sentiments expressed by the Managing Director of the International Monetary Fund (IMF), Kristalina Georgieva, also weigh on the upside potential for Gold prices. Our analysis indicates a bearish continuation.

In summary, the consolidation in Gold Price reflects concerns related to the US debt limit extension, while the prospects of a US debt payment default and hawkish signals from the Fed and IMF further impact the Gold price movement, leading us to anticipate a bearish continuation.