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Dollar Up, Gold Price Down as US Inflation Tops Debt-Ceiling Risk to Drive Fed Rate-Rise Bets Higher

The DOLLAR rose and the price of gold fell Thursday in London despite the growing risk of the United States defaulting on its debt obligations in early June thanks to the debt ceiling stand-off in Washington, while new data also said the world's largest economy is growing much slower than analysts forecast.
Inflation drove the slowdown in first-quarter GDP growth, today's US figures said, raising bets that the Federal Reserve will keep increasing rather than reversing its interest-rate hikes in the back-half of 2023.
Last night the Republican-controlled Congress narrowly passed the 'Limit, Save, Grow Act', which would push back the date for America's government debt to hit its legally approved ceiling by 9 months, while capping President Biden's spending plans to cut the projected budget deficit by nearly $5 trillion over the next decade.
"[So now] the negotiations need to happen on the Democrat side – in the Senate, in the White House," says Majority Leader Steve Scalise.
US and other Western government borrowing costs rose Thursday as bond prices slipped, while the gold price – having ticked above $2000 per ounce for the 9th time this week – fell 1.4% inside an hour on the GDP and inflation data, more than erasing its prior rally from last weekend's level.
Slowing from 6.6% to 5.1% annualized growth in nominal Dollar terms, the US economy expanded by only 1.1% after accounting for January-to-March's rise in inflation, the Bureau of Economic Analysis said.
Chart of US GDP growth (blue) vs. GDP price inflation (red). Source: St.Louis Fed
Core PCE prices – the Federal Reserve's preferred measure of underlying inflation, stripping out volatile fuel and food costs – meantime showed a 4.9% increase on today's new Q1 data, accelerating from the prior quarter's 4.4% reading and topping analysts' consensus forecasts by 0.1 points.
That saw betting in the futures market jump to put odds of 4-in-5 on the Federal Reserve raising its key overnight interest rate next week to 5.25% per annum – the peak reached in the Fed's pre-global financial crisis rates cycle – despite both the US' political debt-default risk and the fresh 50% plunge in mid-tier bank First Republic's stock (NYSE: FRC) following $100bn of depositor withdrawals during the banking mini-crash of January to March.
"Regulators have so far refrained from stepping in," says Bloomberg, "betting that banks that deposited $30 billion into First Republic in March [at the government's request] can hash out a deal to ensure the firm does not fail and take some of their money with it."
For the United States' debt ceiling row, "Great powers don't default," says an op-ed column at Foreign Affairs, claiming that the political stand-off "will impair American power at a time when China and Russia are looking to exploit every weakness they can."
"Experienced observers doubt that there will be a default with the likely ensuing chaos," says bullion-market specialist Rhona O'Connell at brokers StoneX, "[and] gold's holding pattern would tend to underpin those views.
"But further fracturing is likely to bring gold back into focus."
Gold prices also fell steeply in Euros and other non-Dollar currencies today, falling through €1800 per ounce and hitting a 3-week low for UK investors beneath £1587.
Silver prices like gold also fell after the US GDP and inflation numbers, falling back through $25 per ounce yet again after reaching that 12-month high at the start of April.
Platinum also fell back through its nearest 'round number' at $1100 per ounce, but palladium recovered the $1515 level after briefly spiking down to $1470 on the US inflation report.


Adrian Ash

Adrian Ash, BullionVault Gold News

Adrian Ash is director of research at BullionVault, the world-leading physical gold, silver and platinum market for private investors online. Formerly head of editorial at London's top publisher of private-investment advice, he was City correspondent for The Daily Reckoning from 2003 to 2008, and he has now been researching and writing daily analysis of precious metals and the wider financial markets for over 20 years. A frequent guest on BBC radio and television, Adrian is regularly quoted by the Financial Times, MarketWatch and many other respected news outlets, and his views from inside the bullion market have been sought by the Economist magazine, CNBC, Bloomberg, Germany's Handelsblatt and FAZ, plus Italy's Il Sole 24 Ore.

See the full archive of Adrian Ash articles on GoldNews.

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