Gold trading has remained positive since last weekend after the US Non-Farm Payrolls (NFP) report recorded a reading higher than market expectations. The data signals that the US labor market is still strong and stable.
In geopolitical developments, US President Donald Trump rejected the latest peace proposal from Iran, describing it as completely unacceptable.
The statement again increased tensions in the Middle East, thus maintaining risk sentiment in global markets.
The tensions also affected the energy market as crude oil prices continued to rise, driven by concerns about supply disruptions if a prolonged conflict occurs in the region.
At the same time, Trump also stated that the ceasefire efforts between the two countries are currently in a fragile state and are described as only relying on "life support", thus indicating that the risk of instability is still high in the current geopolitical landscape.
US Inflation Shows the Real Impact of the Energy Conflict
Market attention is now fully shifting to the US Consumer Price Index (CPI) report for April, which will be published at 8.30 pm tonight (Tuesday).
This data is considered one of the main drivers of market direction because it provides the clearest picture of inflationary pressures in the US economy, thus determining the Federal Reserve's (Fed) monetary policy expectations.
The headline CPI is expected to increase to 3.8% year-on-year, compared to 3.3% in the previous month, with the increase largely driven by a surge in energy prices, especially crude oil.
Meanwhile, the core CPI is projected to increase to 2.9% compared to 2.6%, indicating that price pressures have not yet fully subsided in the US domestic economy.
Investors will see this inflation figure as a real 'sentiment test' of the direction of interest rates.
The market is currently in a sensitive phase where any data shock can change expectations quickly, especially regarding the period of high interest rates that has long burdened global financial markets.
What is the Impact on the Market?
Scenario 1: If the CPI comes in higher than expected, it has the potential to reinforce the view that the Fed will maintain tight monetary policy for a longer period (Higher for Longer).
This situation usually supports the strengthening of the USD, but at the same time can put pressure on assets such as gold and the stock market.
Scenario 2: If the inflation reading is lower than expected, the market is likely to start reviving speculation about the potential for early policy easing.
This will open up space for more positive risk sentiment, thus providing support to assets such as gold and equities.
Technical Market Structure
The XAU/USD market dynamics at this time are seen to be going through a quite exciting phase for investors.
If observed through the daily chart displayed, it is clear that the aggressive upward momentum that once brought the price to a peak above the $5,400 level has now started to lose its fangs.
The market has now officially entered a consolidation zone or a long horizontal movement, where both buyers and sellers seem to be engaged in a fairly intense tug-of-war to determine the next major direction.
Technically, the current price structure shows a rather worrying pattern for ‘long’ position holders. Gold is now seen struggling to maintain its position above the short and medium term moving average lines.
The presence of the 21 SMA and 50 SMA moving averages which are currently above the current price level act as a fairly hard dynamic resistance ceiling.
Every time the price tries to make an increase to challenge the $4,800 zone, the market immediately responds with selling pressure that forces the price back down.
This gives an early signal that the market sentiment is currently more inclined to ‘Sell on Rally’ than chasing the increase at higher levels.
This situation is also supported by the relative strength indicator or RSI which is currently hovering around 50. This position technically represents a neutral zone, where momentum is not in favor of either party.
The absence of a sharp slope on the RSI reflects fatigue in the market, which is often a sign that investors are waiting for a larger fundamental catalyst.
That is, whether it is necessary to examine the US economic data or geopolitical tensions before deciding to make a new big jump or surge.
If we look at the support structure, the price is currently approaching a critical zone around $4,600 to $4,695. This area is the last bastion to prevent gold from falling further towards lower psychological levels.
Failure to maintain the structure above this level could trigger panic in the market, which could drag the price towards a stronger demand area around $4,400 or more extreme, testing the 200 SMA moving average which is still far below.
On the other hand, if gold manages to gather strength to convincingly break the dominance of the 50 SMA resistance, we may see a renewed attempt to challenge the $5,000 level again.
Technical observation this time, the gold market is in a healthy correction phase but full of risks if the current support fails to hold. Traders need to be more careful with any ‘false breakout‘ at the current resistance zone.
In this market that is currently searching for direction, patience to wait for price confirmation outside the consolidation box is key before making any major trading decisions.
Gold may still retain its safe haven status, but technically, the bullishness needs to break above the $4,800 barrier before investors can breathe a sigh of relief.
