The US dollar rose while gold prices fell on Thursday in London, despite the increasing risk of the United States defaulting on its debt obligations in early June due to the debt ceiling standoff in Washington. Meanwhile, new data revealed that the world's largest economy is growing at a much slower pace than analysts had predicted.

Inflation contributed to the slowdown in first-quarter GDP growth, according to the US figures released today. This has led to increased speculation that the Federal Reserve will continue raising interest rates, rather than reversing them, in the latter half of 2023.

Last night, the Republican-controlled Congress narrowly passed the 'Limit, Save, Grow Act,' which would postpone the date for America's government debt to reach its legally approved ceiling by nine months. Additionally, it would cap President Biden's spending plans, cutting the projected budget deficit by nearly $5 trillion over the next decade.

Majority Leader Steve Scalise stated that negotiations now need to occur on the Democratic side, involving the Senate and the White House.

Western government borrowing costs, including those in the US, rose on Thursday as bond prices slipped. Gold prices, which had surpassed $2000 per ounce for the ninth time this week, fell 1.4% inside an hour following the release of the GDP and inflation data, erasing its prior gains since last weekend.

The US economy's growth slowed from 6.6% to 5.1% in nominal dollar terms, with an expansion of only 1.1% after accounting for the inflation increase from January to March, according to the Bureau of Economic Analysis. Core PCE prices, the Federal Reserve's preferred measure of underlying inflation, showed a 4.9% increase, accelerating from the previous quarter's 4.4% reading and exceeding analysts' consensus forecasts by 0.1 points.

As a result, futures market betting surged, with 4-in-5 odds that the Federal Reserve will raise 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. This is despite the US political debt-default risk and the significant 50% drop in mid-tier bank First Republic's stock (NYSE: FRC) following $100 billion of depositor withdrawals during the banking mini-crash from January to March.

Bloomberg reported that regulators have so far avoided intervening, hoping that the banks that deposited $30 billion into First Republic in March at the government's request can negotiate a deal to prevent the firm's failure and their potential losses.

Regarding the US debt ceiling issue, an op-ed column in Foreign Affairs stated that 'great powers don't default,' arguing that the political standoff could weaken American power at a time when China and Russia are looking to exploit any vulnerabilities.

Rhona O'Connell, a bullion-market specialist at brokers StoneX, expressed doubt that a default would occur given the likely ensuing chaos, noting that gold's holding pattern seems to support this view. However, she added that further fracturing could bring gold back into focus.

Gold prices also experienced significant declines in euros and other non-dollar currencies, falling below €1800 per ounce and reaching a three-week low for UK investors at under £1587. Silver prices followed a similar trend, dropping back below $25 per ounce after hitting a 12-month high at the beginning of April.