Gold outlook: XAU/USD enters key resistance zone ahead of CPI

Gold prices we have been contained for much of the session so far today after a sharp rebound last week, climbing almost 7.5% after spending several weeks moving sideways around the $4,000 level. The strength of the move has put the precious metal firmly back on traders’ radar, but the key issue now is whether this breakout can develop into a more sustained uptrend or whether it ultimately proves to be another sharp rally within a broader consolidation phase. For now, I remain sceptical and think the near-term gold outlook remains murky at best.

 

US labour market weakness weighs on the dollar

 

Some of the sharp gains from last week were at least partially attributed to weakness in US data. The latest catalyst for the move came from Friday’s US employment figures, which provided another setback for the dollar. Payrolls fell by 20,000, but the deterioration was even more pronounced once previous months’ figures were revised lower. More than 100,000 jobs were removed from earlier estimates, bringing average employment growth over the past three months down to roughly 20,000.

Unsurprisingly, gold prices rallied as a weaker growth backdrop reduces the case for tighter monetary policy, while a softer dollar lowers the cost of the metal for non-dollar buyers. But the key question now is whether there is much momentum left in that move.

 

Inflation becomes the next major market test

 

Before the 16 September FOMC meeting, we have another employment report in early next month, plus two inflation releases and the Jackson Hole symposium. The significance of these events for the gold outlook will ultimately come down to how they reshape expectations for Fed policy. If the data continue to point towards a cooling economy without a meaningful resurgence in inflation, markets could further reduce expectations for tighter policy. That would likely leave the dollar vulnerable and provide another supportive backdrop for gold.

 

But the opposite scenario remains a clear risk: A stronger inflation print or sequence of economic data releases could quickly force investors to rethink their assumptions around monetary policy, potentially triggering a rebound in yields and the dollar.

 

The first major test arrives on Wednesday with the release of July’s US CPI report. The figures could be particularly important given Fed Chair Kevin Warsh’s focus on keeping inflation under control following previous policy missteps.

 

Economists are looking for headline CPI to rise 0.1% month-on-month, which would leave the annual rate at 3.4%. Core CPI is expected to increase by 0.2% on the month, keeping annual core inflation at 2.5%.

 

Higher oil prices keep the inflation risk alive

 

A softer CPI reading would strengthen the argument for a more dovish Federal Reserve and could give gold another leg higher. However, there is still a meaningful inflation risk hanging over the market.

 

Oil prices have risen nearly 5% today and remain elevated, creating the potential for renewed pressure on consumer prices. A hotter-than-expected inflation report could therefore produce a rapid reversal in rate expectations. Treasury yields and the dollar have already rebounded and could extend their gains, while gold could give back part of last week’s gains.

 

Markets are currently pricing only around 11 basis points of rate hikes for the September meeting, leaving considerable scope for a hawkish repricing if the data surprise on the upside.

 

With no major US economic releases scheduled for today, some consolidation would not be surprising. The dollar could recover part of its recent losses ahead of Wednesday’s CPI report, potentially placing some near-term pressure on gold.

 

Gold now faces resistance after the breakout

 

From a technical analysis point of view, the next major hurdle for gold sits around the $4,365-$4,425 region. The metal tested this area on Friday and was holding below this zone at the time of writing so far today. This area is particularly important because it brings together a previous swing low from February and an area that has shifted from support to resistance in the past.

 

 

On the downside, initial support is now located around $4,300-$4,305. Below that, the $4,200 area becomes the next level to watch, followed by the $4,100-$4,120 region, which represents the base of last week’s breakout.

 

A sustained move above the $4,365-$4,425 resistance zone would strengthen the case that the latest rally is more than simply a short-term recovery. Conversely, if we start to see gold bleed lower from here, then that will raise the risks of gold giving back its recent gains once again.

 

Gold’s next move depends on US data

 

The fundamental backdrop has clearly become more supportive for gold in recent days following the publication of some weaker than expected US data. The bigger question is whether that momentum can be sustained. After such a powerful weekly advance, a period of consolidation would be perfectly normal. What matters more is whether incoming US data – and oil prices – continue to reinforce expectations of easier monetary policy.

 

For now, the balance of risks has arguably shifted slightly in gold’s favour. But Wednesday’s CPI report could prove decisive. A soft inflation reading may give the bulls another reason to push higher, while a hotter print could expose the metal to a sharp pullback.

 

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R