Gold Price Forecast: XAU/USD falters below $1,985 amid US debt ceiling woes, Fed Minutes eyed

Gold Price (XAU/USD) struggles to defend the previous day’s corrective bounce from the short-term key support line, mildly bid around $1,975 amid early Wednesday. In doing so, the precious metal awaits more clues to cheer the latest pause in the US Dollar’s run-up at the multi-day high as the Federal Open Market Committee (FOMC) Meeting Minutes loom.

It’s worth noting that a pullback in the US Treasury bond yields and doubts over the US debt ceiling extension deal seems to prod the Gold buyers of late. However, the hawkish Federal Reserve (Fed) concerns and expectations that the US policymakers will be able to tackle the default conditions keep the XAU/USD sellers hopeful.

Gold Price improves as US Treasury bond yields retreat amid debt ceiling woes

Gold price benefits from the latest easing in the United States Treasury bond yields, especially as the US debt ceiling woes escalate. That said, the US 10-year and two-year Treasury bond yields retreated from the highest levels since early March the previous day.

It should be noted that a lack of progress in the talks to avoid the US debt ceiling expiration and fears that the US may mark the ‘catastrophic’ default weighed on the market sentiment of late. Recently, US House Speaker Kevin McCarthy crossed wires, via Reuters, while suggesting no deal on the debt ceiling extension today but repeating previous optimism that they will get an agreement before June 01. Previously, Washington rolled out news stating the US Treasury has asked multiple agencies if they can delay the payment demands. Even so, US President Biden and House Speaker McCarthy remain hopeful of avoiding the ‘catastrophic’ default.

Hence, the US decision-makers' optimism to avoid the default keeps the Gold price buyers on the positive side despite the latest challenges to sentiment. While portraying the mood, Wall Street benchmarks saw the red but the S&P 500 Futures seem to struggle for clear directions, marking mild gains of late.

Hawkish Federal Reserve concerns, upbeat United States data prod XAU/USD bulls

While cautious mood amid the mixed feelings for the United States default conditions allow the Gold price to recover from short-term key support, impressive US data and hawkish Federal Reserve (Fed) bets lure the Gold price sellers.

On Tuesday, preliminary figures of the May monthly PMIs signaled that the US Services sector keeps outgrowing the manufacturing ones and fuelled the Composite PMI figure to the highest levels in a year.  That said, the US S&P Global Manufacturing PMI eased to 48.5 from 50.2 versus 50.0 market forecasts whereas Sevices PMI rose to 55.1 compared to 52.6 expected and 53.6. With this, the Composite PMI marked 54.5 figures versus the analysts’ expectations of 50.0 and 53.4.

Elsewhere, the latest comments from Atlanta Fed President Raphael Bostic, Richmond Fed President Thomas Barkin and San Francisco President Mary C Daly who backed the calls for higher Fed rates while citing the inflation woes, which in turn propelled the bets on the Fed rate increase in June. The same push back the Fed rate cut and allows the US Dollar to remain firmer despite a retreat in the US Treasury bond yields, which in turn challenges the Gold price buyers.

FOMC Minutes, US default woes are the key for Gold price directions

Given the mixed markets and the Gold price consolidation ahead of the key events, namely the Minutes of the latest Federal Open Market Committee (FOMC) Monetary Policy Meeting, traders may witness further lack of activity. Even so, updates about the US debt ceiling negotiations and the US-China tension, which are on the spike of late, will be the key to watch for clear directions of the XAU/USD.

Ahead of the FOMC Minutes, FXStreet’s Matias Salord says, “The rise in US yields has been a significant factor behind the US Dollar Index's recent upward movement. The upcoming release could further boost Dollar's strength, especially if they provide an upbeat perspective. However, if the FOMC minutes fail to do so and the outlook is pessimistic, yields could drop, posing a challenge to the current bullish outlook.”

Also read: FOMC Minutes Preview: The complicated task of searching for clues

Gold Price Technical Analysis

Gold price grinds higher after bouncing off an upward-sloping support line from early April, close to $1,954 by the press time. The XAU/USD rebound also takes clues from the bullish signals from the Moving Average Convergence and Divergence (MACD) indicators, as well as justifies the steady Relative Strength Index (RSI) line, placed at 14, surrounding 50.0 level.

With this, the Gold price may extend the latest recovery towards the $1,985 resistance confluence comprising the 50-SMA and a three-week-old descending trend line.

If at all the XAU/USD manages to cross the $1,985 hurdle, the 200-SMA level of near $2,003 can challenge the Gold buyers before directing them to the previous monthly high of around $2,050.

On the flip side, a sustained break of the $1,954 support line could direct the Gold price towards the late March swing low of around $1,934 before giving control to the bears.

In that case, the 61.8% Fibonacci retracement of the bullion’s March-May upside, near $1,911, might offer an intermediate halt to the XAU/USD sellers.

Overall, the Gold Price is likely to grind higher but the upside room remains limited.

Gold Price: Four-hour chart

Trend: Limited recovery expected