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Gold prices slide as dollar rises on Fed rate hike expectations

Traders consider impact of US debt deal and outcome of next Fed meeting on gold prices

Gold prices struggle as US debt optimism and another Fed rate hike weighs on investors. Photo: Getty.
Gold prices struggle as US debt optimism and another Fed rate hike weighs on investors. Photo: Getty (Bloomberg Creative Photos via Getty Images)

Gold prices fell on Tuesday while the dollar strengthened as traders anticipate another interest rate hike by the US Federal Reserve (Fed).

Gold (CG=F) was trading around $1,973 (£1,586), after dropping to its lowest level since 17 March earlier in the session.

It comes as markets are pricing in a 60% chance of a 25 basis-point hike when the Fed next meets in June, compared with a 26% chance a week earlier, according to trading data from the CME Group’s FedWatch tool.

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The Fed’s favourite inflation measure raised the rate hike odds after US consumer spending rose 4.4% from April 2022, data from the Bureau of Economic Analysis showed on 26 May.

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Moreover, core inflation, which excludes prices for food and energy, ticked up 4.7% year-over-year.

Further downside for gold?

Piero Cingari, independent macro analyst, said: “The market implied probability of a June rate hike has risen to 60% now which has led to a strengthening of the dollar. As traders further raise their Fed rate hike bets, the dollar gets a boost and gold retraces.

“I wouldn’t rule out further downside in gold prices towards the $1,900-$1,850 region, where buyers could then reappear.

“Silver (SL=F) I think is more at risk of downside, because it has an even higher inverse correlation with the dollar and Fed interest rates relative to gold.”

Traders back riskier assets

Optimism over a US-debt deal agreement has also weighed on gold prices as investors once again gravitate towards riskier assets, after lawmakers said they had reached a tentative agreement to raise the $31.4tn debt ceiling and avert a default.

Naeem Aslam, chief investment officer at Zaye Capital Markets, said: “In the commodity space, the shining metal is feeling further pressure today as traders continue to back riskier assets, which is taking some shine away from the precious metal.

“Gold traders also know that the Fed is very much itching to increase rates further, and the yield on the two-year Treasury yield is clearly indicating that another rate hike is more than likely to happen. So the dollar index continues to pick up momentum,” he said.

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Doug Turner at Kinesis Money also noted how the stability of gold has been further exacerbated by the ripple effects of the US regional banking crisis, which initially impacted the gold price, and the inclination of investors to explore “superior-performing assets” following gold's surge to the $2080 mark in early May.

“However, it is crucial to note that the current decline in gold prices doesn't necessarily signify a longer-term downtrend, but is more likely a temporary consolidation period driven by the aforementioned macroeconomic influences,” Turner added.

Watch: Biden and McCarthy reach tentative deal to lift US’ debt ceiling

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