XAU/USD Bulls Keep In Control Ahead of US Inflation Data

  • The price of gold posted gains for the third week in a row.
  • The short-term technical outlook suggests that the bullish bias in XAU/USD remains intact.
  • US Consumer Price Index (CPI) data could be next week’s big event.

The price of oro (XAU/USD) The new year began with volatility as investors reassessed the US Federal Reserve’s (Fed) monetary policy outlook following the release of the latest data. after having touched its highest level since the beginning of June above $1,860 mid-week, XAU/USD fell sharply on Thursday but managed to hold above $1,830. With the US jobs report for December and the disappointing ISM services PMI survey weighing on the returns of bonds On the US Treasury, the price of gold regained its traction on Friday and closed for the third straight week in positive territory.

What happened last week?

Activity in financial markets remained subdued on Monday, with stock and bond markets in major economies closed for the New Year holiday.

As trading conditions began to normalize on Tuesday, correlations between markets weakened. Despite the observed positive shift in risk sentiment, the US dollar outperformed its main rivals, including gold. However, the yield on the 10-year US Treasury note fell more than 2% on the day allowing XAU/USD to gain upward momentum.

Data published by the ISM revealed on Wednesday that business activity in the manufacturing sector contracted for the second consecutive month in December. The ISM PMI survey employment index unexpectedly recovered above 5, contributing to the resistance of the US dollar and limited the rise of XAU/USD.

Thursday, ADP reported that employment in the US private sector increased by 235,000 new workers in December. This figure far exceeded market expectations of 150,000 and prompted investors to reassess the Federal Reserve’s policy outlook. The probability of a 25 basis point (bp) rate hike in February, according to the CME Group’s FedWatch tool, dropped to 57% from 73% earlier in the week after these data. In turn, the 10-year US Treasury yield rallied, forcing the negatively related XAU/USD to erase some of its weekly gains.

The US Bureau of Labor Statistics announced Friday that non-farm payrolls (NFP) increased by 223,000 in December, compared to the market expectation of 200,000. Other details in the report showed that the median hourly wage fell to 4.6% from 4.8% (revised from 5.1%) in November. Despite the good numbers of the NFP, weak wage inflation pushed the 10-year US Treasury yield lower and opened the door for a rally in XAU/USD. Finally, the ISM services PMI dropped to 49.6 points in December from 56.5 in November. More importantly, the inflation component, the prices paid index, fell to 67.6 from 70 and was well below market expectations of 71.5. The mixed jobs report and dismal PMI survey caused the US dollar to weaken against its rivals and prompted another move higher in XAU/USD.

Next week

In the United States, there will be no high-impact macroeconomic data releases for the first half of the week. On Thursday, the US Bureau of Labor Statistics (BLS) will release data for the Consumer Price Index (CPI) for December. In monthly terms, the core CPI, which excludes volatile food and energy prices, is expected to rise 0.3% after increasing 0.2% in November.

In October and November, the monthly core CPI rose at a softer-than-expected pace and investors decided it was time for the Federal Reserve to step up the throttle. Although those responsible for monetary policy in the Federal Reserve have reiterated that they do not expect a rate cut in 2023, a fresh soft core inflation reading should weigh on the US dollar and trigger another move higher in XAU/USD.

The minutes of the December monetary policy meeting revealed earlier in the week that most policy makers welcomed the easing of inflation in October and Novemberbut agreed that “substantially more evidence” of progress would be needed to confirm the downward path of price pressures.

Besides, a monthly increase of 0.5% or more in core inflation should lift US Treasury yields and trigger a bearish turn in the price of gold.

Looking ahead to the weekend, the University of Michigan preliminary January survey of consumer sentiment will be in the spotlight. Rather than the overall consumer confidence index, market participants will likely pay close attention to the 5-year consumer inflation expectations component, which stood at 2.9% in December. A significant change in that number is unlikely, but a direct and short-lived market reaction could be in the offing, with a rebound in long-term inflation expectations lifting the dollar against gold and vice versa.

Gold Price Technical Outlook

The short-term technical outlook of the XAU/USD remains bullish as the relative strength indicator (RSI) on the daily chart breaks above the 60 level. Furthermore, the pair remains comfortably above the 20-day simple moving average (SMA) as it continues to follow the trend line upward.

The static level of 1.860$ ranks as the first resistance. Once XAU/USD confirms that level as support, it could go for 1.880$ (61.8% Fibonacci retracement of the long-term downtrend), 1.900$ (psychological level) and 1.920$ (old support, static level).

In the event that the price of gold falls below the 1.810$ (20-day SMA), the bearish correction could extend into the 1.800$ and the 1.780$ (38.2% retracement of Fibonacci200-day SMA).

Gold Sentiment Survey

Despite a bullish start to the year in XAU/USD, the Foreign Exchange Forecast Survey points to a one-month downtrend, with a medium target at $1,811.


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