Gold and Precious Metals

US Inflation to Dictate Direction, Volatility Looms Ahead


  • Gold ticked down this week, but lacked strong conviction, with prices fluctuating aimlessly around the 50-day SMA, a sign of consolidation
  • The January U.S. inflation report will be the focus of attention and a potential source of market volatility in the week ahead
  • This article looks at XAU/USD’s technical outlook, examining important price thresholds worth watching in the near term

Most Read: US Dollar Eyes US CPI for Fresh Signals, Setups on EUR/USD, GBP/USD, Gold

Gold prices (XAU/USD) closed the week down approximately 0.75%, settling slightly below the $2,025 mark, dragged lower by the sharp jump in U.S. Treasury yields seen in recent days following a string of strong U.S. economic data, including the January nonfarm payrolls report. For context, the yield on the 10-year U.S. bond was trading below 3.9% last Thursday, but has now surpassed 4.15% in less than seven sessions.


Source: TradingView

Earlier in the year, the prospects for bullion appeared more positive. However, the bullish outlook has weakened, particularly after Federal Reserve officials began to coalesce around the stance that additional strides in controlling inflation are necessary before beginning to reduce borrowing costs, which currently stand at their highest level in more than two decades.

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The central bank’s guidance has prompted the unwinding of overly dovish bets on the monetary policy path, as seen in the chart below. Traders now discount just 102 basis points of easing for 2024, a sharp reduction from the nearly 160 basis points expected mere weeks earlier. The shift in market pricing has boosted the U.S. dollar across the board, creating an unfriendly environment for precious metals.


Source: TradingView

The FOMC’s current position to wait a bit longer before removing policy restriction could be validated if January inflation numbers, due for release on Tuesday, reveal limited inroads toward price stability. In terms of estimates, headline CPI is forecast to have cooled to 3.0% y/y from 3.3% y/y previously. The core gauge is also seen moderating but in a more gradual fashion, slowing only to 3.8% y/y from 3.9% y/y in December.


Source: DailyFX Economic Calendar

If progress on disinflation falters or proceeds less favorably than anticipated, U.S. Treasury yields are likely to push higher, reinforcing the greenback’s recovery witnessed recently. This should be bearish for precious metals, at least in the near term.

Conversely, if CPI figures surprise to the downside, the opposite scenario may play out, particularly if the miss is significant. This could lead to lower yields and a softer U.S. dollar, boosting gold prices in the process. Regardless of the outcome, volatility should make an appearance in the coming week.

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Gold (XAU/USD) fell modestly this past week, but lacked a strong directional bias, with the metal moving up and down around the 50-day simple moving average, a clear sign of consolidation. The market’s lack of conviction is not likely to end until prices either breach resistance around $2,065 or support near $2,005.

As for possible outcomes, a resistance breakout could trigger a rally towards $2,085 and possibly even $2,150 in case of sustained strength. On the other hand, a support breakdown could boost downward impetus, setting the stage for a drop towards $1,990. On further weakness, the spotlight will be on $1,975.


Gold Price Chart Created Using TradingView

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