Gold outlook: XAU/USD remains undermined amid Crude oil, USD pressure

At the time of writing, gold was down about 1.5% and was looking quite bleak amid the strength in USD and bond yields. The yellow metal closed in the red last week, unable to build onto the small gains from the week before. The underlying trend remains bearish. While gold may still be up a tiny bit this month, it had fallen more than 11% in June, which was its fourth consecutive losing month. Thus, the path of least resistance and the gold outlook remain to the downside and I am still expecting a breakdown below the $4,000 level soon.

Gold outlook: It is all about oil prices again

The renewed tensions in the Middle East have pushed oil prices higher again at the start of this week. This has weighed on equity markets. Under normal circumstances, you might expect gold to perform better in that environment because of increased demand for safe-haven assets. However, as I’ve mentioned before, gold has increasingly traded in line with the S&P 500 over recent years, with investors treating it more as a risk asset than a traditional safe haven.

If oil prices continue to push higher, that will only reinforce expectations that the Fed could remain more hawkish over the coming months. If that happens, I think the outlook for gold remains tilted to the downside.

Dollar likely to remain supported on oil

On top of that, the stronger US dollar is adding further pressure. Given that the Fed’s new chairman has made it clear that he wants to keep inflation under control, another spike in oil prices is likely to reinforce expectations that US interest rates will stay higher for longer. 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 momentum, particularly against currencies whose economies are heavily reliant on imported energy, such as the euro and the Japanese yen.

CPI and Fed testimony among key highlights

As oil and natural gas prices climb, investors are becoming increasingly reluctant to price out further Fed tightening, providing the greenback with another tailwind and this is weighing on gold’s appeal. From a data point of view, the focus now turns to a busy week for US economic data and Federal Reserve officials. Tuesday’s inflation report will be closely watched, with headline CPI expected to ease on a monthly basis. However, firmer energy prices and sticky core inflation, still hovering around 2.8% to 2.9% year-on-year, suggest it remains premature to rule out another rate increase before the end of the year.

Markets will also hear from Fed Chair Kevin Warsh as he begins two days of testimony before Congress. Investors will be looking for any clues on the policy outlook. The calendar also includes producer and import price data and retail sales.

Technical gold outlook and key levels to watch

Turning to the charts, the technical gold outlook also 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. Price is now approaching the $4,000 level ahead of the release of US CPI on Tuesday.

For that reason, I’m looking for a break below the $4,000 level. If we get a daily close beneath it, then the next downside targets come in around $3,900, followed by $3,800 on the daily chart of XAUUSD.

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

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