Gold prices plunge on debt ceiling optimism; FOMC meeting minutes in focus for coming week

The yellow metal has been in a continuous downtrend since the start of the week and is poised for the biggest weekly loss since February 2023, as progressive talks towards the resolution of the US debt ceiling crisis have dampened safe-haven demand.

The US House Speaker Kevin McCarthy said that negotiators on the federal debt limit may reach an agreement in principle as soon as this weekend, while President Joe Biden’s aids said that they are making “steady progress” in talks with Republicans.

This comes after US Treasury Secretary Janet Yellen reiterated that the US might run out of money to pay its debts as soon as 1st June if Congress doesn’t step in.

Easing fears of a potential debt default has boosted the dollar index and treasury yields, further weighing down gold prices.

Concerns about the strength of the US banking sector also eased after Western Alliance Bancorp reported growth in deposits.

Data releases from the US in the week gone by showed that consumer spending is holding up and Labour market outperforming expectations. The US retail sales increased in April, with value of retail purchases rising 0.4% m/m after an upwardly revised 0.7% decrease in March.

The US weekly jobless claims on the other hand fell more than expected during the previous week whereas the Philadelphia Fed Manufacturing Index in the US increased to -10.4 in May 2023 from a nearly three-year low of -31.3 in April.Better than-expected data from the US and debt ceiling optimism prompted some of the Fed officials to be hawkish this week. Still, officials are very much split over whether to hike, skip or pause in June.

Fed Governor Michelle Bowman said that the Federal Reserve will likely need to raise interest rates further and hold them higher for some time if US price pressures don’t cool off and the jobs market shows no sign of slowing. One of the most hawkish Cleveland Fed President Loretta Mester explicitly left the option of doing more on the table.

Dallas Fed President Lorie Logan suggested that she’s not ready to call a halt to the Fed’s tightening campaign. Renewed hawkish rhetoric and speculation that the Federal Reserve may raise rates again, has boosted the greenback to a seven-week high of 103.6 levels.

The rate-sensitive two-year treasury yields surged more than 20 bps this week, weighing on the non-yielding bullion.

Lower than-expected consumer spending, retail sales, and industrial activity from China for April month, also bolstered the greenback.

The recent re-pricing in Fed funds expectations has been substantial. A week ago, markets were pricing in very little to no chances of a rate hike in June and 75 bps of cuts by December 2023.

Now, the CME Fed Watch tool is showing a 38% probability of a 25 bps hike in the June FOMC meeting and swaps are pricing in around less than 50 basis points of rate cuts by December.

FOMC meeting minutes, Fed’s preferred PCE price index, and preliminary PMIs from US, UK, and Eurozone will be in focus for the coming week. US debt ceiling uncertainty might be resolved by this week or next and then focus will again turn to economic data and monetary policy outlook.

Despite recent hawkish comments from a few officials, we don’t expect another rate hike during the June meeting as the majority of Fed officials telegraphed a “wait and watch” approach.

FOMC meeting minutes might also signal rising odds for a Fed pause. PCE price index might indicate easing price pressure and thus gold prices might stay buoyed for the coming week.

On the price front COMEX Gold has moved below the strong support of $1970/troy ounce which the bulls held for almost a month.

Having said that a weekly close below $1970/ troy ounce would give the bears the edge to pull it lower towards $1938/ troy ounce.

On the flip side, if the bulls regain $2000/troy ounce on closing, then we can conclude that a temporary bottom is in place.

(The author is VP-Head Commodity Research, Kotak Securities Ltd)