A resurgence in demand for the USD has unexpectedly led to Gold falling below $2,000. This is the first time that the Gold price has dropped below $2,000 since May 1, and it appears that more selling is likely ahead. The reason for this is because price action has been encouraged by technical analysis. Partly because the trading environment elsewhere for global assets has been choppy. Partly because the economic picture on many levels remains very uncertain.
Either way, the Gold price falling below $2000 will encourage buyers to take profit on positions. This trend is more likely than not to continue into Wednesday trading. The Gold price might even drop to $1980 today. This does not mean that the rally of 2023 is over for Gold by any means. However, sellers have now taken short-term control of the asset.
What is encouraging the stronger USD?
This unexpected change of events has been encouraged by improved demand for the Dollar.
From a fundamental point of view, the US debt ceiling standoff continues. This is political gridlock at its finest and in fact, should be of benefit for assets of safety. What should also have provided support is indications that US consumers are feeling the challenges from higher United States interest rates. This was highlighted as a potential risk just yesterday.
However, in spite of some signs of challenges for US consumers it appears that the Federal Reserve will not change its stance. The market is waiting with anticipation from the Fed to signal its next plan for interest rate policy. Unfortunately, it is in no hurry to provide. It appears more and more likely as if we will be waiting months for the Fed to provide a signal.
Should the Federal Reserve suggest that US interest rate policy cannot be maintained at such high levels, a signal would be provided that the most famous precious metal of them all can appreciate.
Elsewhere, the clock is continuing to tick closer and closer for the United States to potentially default on its obligations. As has been mentioned various times, this is political gridlock at its finest. United States President Joe Biden will likely take an increased public stance on the matter over the upcoming days. Do not be surprised if officials from either side of the negotiations make threats over this period.
Eventually, the United States debt ceiling can will be kicked down the road for a later date. We are used to this event taking place and all of the drama surrounding it for years.
However, neither official wants to be seen as backing down. Especially as we head into Presidential Elections year in 2024.
How global markets are reacting to tense atmosphere
For the moment, the standoff regarding the United States debt ceiling is likely to encourage a risk averse reaction in global markets.
The Dollar and Japanese Yen appear to be favourite assets for traders. Gold price of course can be counted in this discussion as well.
Nonetheless, such a tense atmosphere is anything but helpful to world financial market sentiment. A risk off atmosphere is in the works. In such an event, global markets and assets associated as risky for an investor portfolio should be monitored. This is likely to include oil and emerging markets fx.
Turkish Lira one to watch for emerging markets fx
Speaking of emerging markets fx, do not be surprised to see the Turkish Lira become a trending topic throughout the remainder of May 2023. At the very least.
The Presidential Elections are going to a second round at the end of the month. It also appears that officials within Turkey are already trying to contain a Turkish Lira that has dramatically weakened over a number of years.
With that being said, all indications currently point towards further weakness for the Turkish Lira ahead.
Current Turkish President Erdogan appears to be on the upper-hand heading into the second round of the Presidential Elections. He also has a very loyal following within Turkey after approximately two decades in very senior leadership positions for the country.
Yet, it is the economic and monetary policies of Erdogan that have in fact inspired drastic currency weakness. Several Central Bank governors within the Central Bank of the Republic of Turkey have been dismissed. This has contributed to excessive Lira weakness. At the same time, Erdogan has been no stranger to making comments in public over central bank policy. This has been the case for years.
Now that the Turkish Elections are heading into a second round, it might be a case of the currency weakening no matter the outcome.
Should Erdogan be victorious, a different narrative to public comments on interest rate policy is required for international investors to regain trust in the Lira. This is unlikely to occur. At the same time, if Erdogan is not victorious his following is so loyal that any Presidential Elections outcome apart from him remaining as President is likely to be contested.