XAU/USD Outlook: Gold Rally Faces Reversal Test Ahead of CPI

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• Inflation days typically produce larger gold trading ranges
• Nearly one in four post-pandemic CPI days have seen 2%+ ranges
• $4,367 remains key level for XAU/USD

Gold has had an extremely strong run, one that, as covered in a separate note yesterday, is close to unprecedented based on moves in traditional macro drivers such as the US dollar and US Treasury yields over such a short period. But after such a pronounced surge, there are now some warning signs that the move may be running out of steam.

What a Decade of Inflation Days Shows

Based on a look back at inflation days over the past decade, it’s clear these releases generally don't provide a huge directional edge for gold traders. That said, they do tend to generate slightly larger trading ranges and a modest skew towards positive closes compared with non-inflation days.

Source: LSEG, FOREX.com

The average intraday range has been 1.54%, compared with 1.41% on other sessions, while gold has closed higher on 60.5% of inflation days versus 53.5% of non-inflation days.

While there’s no significant divergence in performance, that’s not to say these releases don’t provide trading opportunities. Over the past decade, around one in five inflation reports has coincided with an intraday range of at least 2%, with the vast majority sitting somewhere between 1% and 2%.

Source: LSEG, FOREX.com

Breaking the sample down either side of the pandemic also reveals an interesting shift. Before March 2020, inflation days produced a stronger skew towards positive closes and larger average gains. Since then, the directional edge has weakened, but volatility has increased, with the proportion of sessions generating an intraday range of at least 2% more than doubling from 11.6% to 23.7%.

That perhaps shouldn’t come as a surprise. Before the pandemic, inflation was generally low and often undershot expectations. Since then, we’ve moved into a much higher inflation regime marked by repeated supply shocks and far greater uncertainty. The predictability of the pre-pandemic world simply isn’t there anymore.

Of course, historical tendencies provide context rather than certainty and offer no guarantee of how gold will react later today.

XAU/USD Technical Setups

 

Source: TradingView

Looking at XAU/USD on the daily chart, the price failed to hold above the 100-day moving average on Tuesday, leaving behind a daily candle resembling a shooting star. Coming after such a strong rally, that raises the risk of a near-term reversal. Depending on how price action develops today, there is also the potential for a three-candle evening star to form.

For now, the price continues to find support around $4,367, a level that has acted as both support and resistance earlier this year. That makes it an obvious level to watch heading into US inflation later in the session.

If the bearish reversal signal is confirmed, one potential setup would be to wait for a break beneath $4,367. If the price can break below and hold there, shorts could be considered with a tight stop above for protection, targeting $4,300 initially before $4,200, part of the breakout zone smashed through last week.

However, this is not a slam dunk case for shorts. RSI (14) and MACD continue to point to the bulls having the ascendancy, while XAU/USD has already bounced from $4,367 during Asian trade on Wednesday.

If the price continues to hold above the level, pullbacks towards $4,367 could be bought with a tight stop beneath for protection. The first target would be Tuesday’s high around $4,435, with the 200-day simple moving average near the psychologically important $4,500 level beyond that.