In 2011, gold prices soared as the US faced a debt ceiling crisis, with the USD Index taking a hit. However, the likelihood of a similar event this time around is low as lawmakers are expected to have learned from past mistakes. Although investors anticipate that the debt ceiling drama drives up gold prices, it is more probable that the bulk of the PMs' rallies driven by it are already in the rearview.
As the debt ceiling drama looms, the USD Index has been suffering recently. There are concerns that the European Central Bank (ECB) could out-hawk the Federal Reserve (Fed), leading to the possibility of the EUR/USD benefiting from a resilient US stock market and low volatility.
The EUR/USD moves in the opposite direction of the Cboe Volatility Index (VIX), and for nearly a year, the currency pair has moved in tandem with risk-on sentiment. However, with the VIX expected to rise in May and June, coupled with a rare weekly RSI reading, the data supports more uncertainty in the forex market.
The USD Index showcases seasonal strength in May and July, with a sharp rally often following in early May, followed by a pullback, and then another breakout to new highs. While investors assume that April’s winners will maintain their outperformance, the VIX and the USD Index jumping could turn the PMs’ trends bearish.
The Fed’s tightening cycle is expected to continue, leading to a bullish outlook for the USD Index and real interest rates. While investors are anticipating rate cuts, pricing pressures remain problematic, and the year-over-year base effects will end in June. As a result, the month-over-month readings will matter more, leading to implications that are far from priced in.
Forex traders are closely monitoring the situation with the US debt ceiling and how it could impact the market. The USD Index, which measures the value of the US dollar against other major currencies, has already been impacted as the debt ceiling drama looms. Forex traders are expecting more uncertainty in the market, particularly in May and June, as the VIX clock turns bullish, which could affect the PMs’ trends. As the Fed’s tightening cycle continues, forex traders are expecting a bullish outlook for the USD Index and real interest rates. However, the market remains unpredictable, and traders should be aware of the risks involved in forex trading.