Gold forecast: XAU/USD unable to benefit from weak US inflation data

The price of gold was down nearly 1% at the time of writing at midday in London, with the metal unable to further extend its two-day recovery. This comes as the dollar was looking to steady itself after suffering a double dose of inflation surprises this week with both CPI and PPI coming in weaker than expected. Meanwhile, we have also seen a bit of a risk off trade creeping into the stock markets with chipmakers under pressure. As before, I maintain a modestly bearish view on the near-term gold forecast and still expect a breakdown below the $4000 level.

 

So why is gold struggling?

 

Well. There are a few reasons why gold is struggling despite the weaker inflation data we have seen this week. For one thing, one month’s worth of data is not going to impact the Fed’s thinking much and that’s something Chris Waller highlighted yesterday. Waller wants to see a clear disinflationary trend over the course of a few months. That’s not going to be the case if oil prices now remain elevated after making a comeback in recent days due to the re-escalation of tension between the US and Iran.

 

Even if some of the near-term economic data softens, persistently high energy prices would make it difficult for the Fed to adopt a more dovish stance. That is one of the reasons why we’re seeing the US dollar regain a bit of momentum again today, particularly against currencies whose economies are heavily reliant on imported energy, or those where interest rates are low, such as the Swiss franc and the Japanese yen. For the same reason, investors are preferring the dollar over the zero-yielding gold.

 

On top of these macro factors, momentum has been completely lost in gold which is discouraging speculative traders wanting to ride the wave. If you recall, the yellow metal fell more than 11% in June, which was its fourth consecutive losing month. Thus, the path of least resistance and the gold forecast remain modestly to the downside, and I am still expecting a breakdown below the $4,000 level soon.

 

Technical gold forecast and key levels to watch

 

From a technical analysis point of view, our gold forecast remains bearish. The metal has struggled in recent days to climb back above the $4,100 level, and instead it has remained below both the bearish trend line and the 21-day exponential average. The 50-day crossed below the 200-day average not so long ago and that further aids the bearish narrative.

 

 

Thus, I’m looking for a break below the $4,000 level on XAUUSD – possibly as later as today now that both inflation reports are out of the way. If we get a daily close beneath it, then the next downside targets come in around $3,900, followed by $3,800.

 

Resistance above the $4100 area comes in around $4,136 initially, followed by $4,200 and then at $4275.

 

In short, with energy prices firming and little evidence that the US economy is slowing enough to offset inflation risks, the fundamental backdrop continues to favour the dollar. That leaves zero- and low-yielding assets like the yen, franc and gold particularly vulnerable.

 

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R