XAU/USD maintained its positive momentum ahead of tonight's US inflation report, with market attention now focused on the Consumer Price Index (CPI) to be published at 8.30pm tonight.
Broad investor sentiment is still supported by expectations that a more moderate inflation report could reduce pressure on the Federal Reserve (Fed) to raise interest rates.
Market Focus on Inflation & Strait of Hormuz
This week's market is not only focused on the CPI, but is also overshadowed by geopolitical developments in the Middle East.
US-Iran tensions have not subsided as Iran insists the Strait of Hormuz will remain closed as long as Washington does not accept Tehran's conditions. Attacks on shipping in the region have also increased concerns about global energy supplies.
Brent oil prices are now approaching $90 per barrel, while US crude is around $84 per barrel. Rising energy prices have the potential to maintain inflationary pressures and make the Fed's job harder.
At the same time, the previously weak US jobs report has changed sentiment towards Fed policy. The market now sees the chances of a rate hike in September as almost balanced, making tonight's CPI data a key determinant of the next direction.
US CPI To Set Gold's Direction
July CPI is expected to rise 0.1% month-on-month, after recording a 0.4% decline in June.
Annually, headline inflation is expected to ease to 3.4% from 3.5%, while core CPI is expected to be 2.5% compared to 2.6% previously. Core CPI is expected to rise 0.2% month-on-month after being unchanged in June.
Core figures are of interest because they are not heavily influenced by changes in food and energy prices. A lower-than-expected reading could reduce inflation concerns and weaken the USD.
Conversely, a higher reading could strengthen the USD and US bond yields as the market re-evaluates expectations that the Fed will need to maintain tight policy or raise rates.
Fed officials' views also show that inflation remains a major risk. Chicago Fed President Austan Goolsbee described inflation as one of the biggest challenges to the US economy, while several officials remain concerned about the impact of rising energy prices due to the Middle East conflict.
XAU/USD Technical Analysis
Gold prices are still in an uptrend in the short term based on the H1 chart, with clear buying momentum after the price surged from the $4,050 area to around $4,400.
For now, XAU/USD has managed to maintain the upward structure and is currently trading near the $4,400 level. However, momentum is starting to slow down a bit after the rapid rise, indicating that the market is waiting for a new trigger from tonight's US CPI report.
Current Price
$4,402.09 (based on the chart)
Resistance
R1: $4,410
R2: $4,435
R3: $4,450
Support
Q1: $4,390
Q2: $4,370
Q3: $4,350
Scenario 1 — Higher CPI
If the US CPI is higher than expected, the US Dollar has the potential to strengthen as the market reduces expectations of a Fed rate cut. This situation could put pressure on gold to make a correction towards $4,390 and $4,370. If $4,370 is broken, XAU/USD could potentially test $4,350.
Scenario 2 — Lower CPI
If the US CPI is lower than expected, the US Dollar could potentially weaken and expectations of a looser Fed policy could increase. Gold could potentially test $4,410, followed by $4,435. A strong break above $4,435 could open the way for prices to head towards $4,450.
Forecast .
We see the short-term bias remaining bullish as long as prices hold above $4,370. The US CPI is the key catalyst that could potentially determine whether gold continues to rise or corrects.
If inflation data is lower, gold could potentially continue its momentum towards $4,435–$4,450. Conversely, a higher CPI could strengthen the US Dollar and push XAU/USD to the $4,370–$4,350 area.
