As the deadline approaches for the United States to increase its spending limits and prevent a potentially catastrophic default, tensions are steadily escalating.
Congress is responsible for increasing these spending limits to avoid default, but Republican House Speaker Kevin McCarthy will not do so without an agreement on spending cuts and spending limits.
This is leading to a fair amount of uncertainty and the dollar is benefitting as a haven. Given that XAU is priced in dollars, it is also reacting.
The top chart shows FXCM's USDOLLAR basket and the candlestick chart underneath it is gold. The bottom indicator shows the correlation coefficient between the two.
- The USDOLLAR has moved into its bullish channel between the upper blue and red bands. This is due to the uncertainty of the debt-ceiling negotiations and a flight to safety i.e., money is moving to the dollar.
- In reaction to USDOLLAR strength, XAUUSD has moved into its bearish channel between the lower blue and red bands.
- This makes sense given that the correlation coefficient between the two is -56%, reflecting an inverse relationship.
As long as the uncertianity persists, the dollar will likely have a tailwind, with gold feeling the pressure.
Senior Market Specialist
Russell Shor joined FXCM in October 2017 as a Senior Market Specialist. He is a certified FMVA® and has an Honours Degree in Economics from the University of South Africa. Russell is a full member of the Society of Technical Analysts in the United Kingdom. With over 20 years of financial markets experience, his analysis is of a high standard and quality.