Gold bounces back as yields ease

Gold prices rallied on Tuesday, touching $1,960 per ounce after dropping to a two-month low of $1,940 per ounce on Monday. If gold prices increase, resistance may be encountered near $1,985 per ounce, while if they decline, support may be found near $1,900 per ounce.

Gold prices have been predominantly directed by the dollar's movement, as competing gold typically loses appeal as an investment when the dollar rises. The dollar slipped on Tuesday, with the dollar index dropping below 104.1. US Treasury yields also retreated, with the US 10-year bond yield dropping from 3.76% to 3.69%.

Fears of a US debt default promoted a risk-aversion sentiment in the past couple of weeks, boosting safe-haven gold, although the dollar has outperformed gold as a safe-haven asset. US Treasury Secretary Janet Yellen has warned that the office will not meet all US government obligations by June 5th. This would force the country to default on its debt, leading to a major recession.

US President Joe Biden and Republican House Speaker Kevin McCarthy announced over the weekend that they have reached a tentative agreement to suspend the federal government's $31.4 trillion debt ceiling. The deal, however, will have to pass through Congress before the US runs out of resources to meet its obligations. The deal to increase the debt ceiling will be presented to the US Congress on Wednesday. US lawmakers will be called to assess the deal with little time to spare. If the deal is finally approved, safe-haven gold may sink.

The Federal Reserve has signaled a pause in rate hikes, boosting gold prices. US Federal Reserve Chair Jerome Powell has indicated that the US Central Bank may pivot in a more dovish direction.

The Federal Reserve raised interest rates by 25 basis points at its monetary policy meeting last week, bringing the benchmark interest rate to a 16-year high target range of 5.00% to 5.25%. Many analysts predict that there is a high probability of rate cuts starting in November. Expectations of a shift to a more dovish policy provide support for gold prices.

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Written by:
Myrsini Giannouli

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