- Gold price turns red for the first time in ten trading days, consolidating below record highs.
- Dollar and Treasury yields eye US CPI inflation data for the next directional move.
- A weak US CPI report could outweigh overbought RSI conditions, triggering a fresh Gold price rally.
Gold price is dropping for the first time in ten trading days early Tuesday, although keeping its consolidative mode intact near $2,180. Gold price sustains its correction from all-time highs of $2,195, underpinned by a pause in the US Dollar downtrend alongside the US Treasury bond yields.
Will US CPI report help Gold price resume record-setting rally?
The US Dollar has entered a phase of downside consolidation heading into the all-important US Consumer Price Index (CPI) inflation data release on Tuesday at 12:30 GMT. The focus remains on the key inflation gauge, especially after a sharp downward revision to the January Nonfarm Payrolls number and a slew of disappointing economic data from the United States (US).
The February NFP increased by 275K, compared to market forecasts of 200K while the January figure of 353K was revised lower by 124K to 229K. Meanwhile, Average Hourly Earnings, a measure of wage inflation, rose 4.3% YoY in February, slowing from a 4.4% growth recorded previously.
Markets are currently pricing in about a 70% chance that the Fed could begin easing rates in June, a tad lower than a 75% probability seen on Monday, according to the CME FedWatch Tool.
The annual US CPI is seen rising 3.1% in February, at the same pace as seen in January while the core inflation is seen easing from 3.9% in January to 3.7% YoY in the reported period. The more important monthly CPI is expected to rise 0.4% last month vs. a 0.3% increase in January. The Core CPI inflation is foreseen at 0.3% MoM vs. 0.4% in the first month of the year.
A downside surprise in the monthly headline and core CPI inflation is likely to seal in a June interest rate cut by the US Federal Reserve (Fed), triggering a fresh sell-off in the US Dollar while sending Gold price to a new record high. US Treasury bond yields will come under intense bearish pressure on a US CPI negative surprise, initiating a fresh uptrend in the non-interest-bearing Gold price.
On the other hand, Gold price could see a sharp correction if the US Inflation data comes in hotter-than-expected and weighs heavily on the expectations of a dovish Fed policy pivot as early as in June.
In the run-up to the US CPI release, Gold price is likely to maintain its cautious trading momentum, as risk sentiment remains slightly upbeat.
Gold price technical analysis: Daily chart
The near-term technical outlook for Gold price remains more or less the same, with a correction likely in the offing amid overbought conditions on the daily chart, as indicated by the 14-day Relative Strength Index (RSI).
However, the next directional move in Gold price remains at the mercy of the US CPI data.
A downside surprise in the US CPI numbers could propel Gold price toward the all-time high of $2,195, above which a sustained break above the $2,200 threshold is needed to take on the $2,250 psychological level.
On the flip side, hot US inflation data is likely to extend the Gold price correction toward the March 8 low of $2,154.
The next cushion is seen at $2,145, where the March 7 low and the 23.6% Fibonacci Retracement (Fibo) level of the recent rally from the February 14 low of $1,984 to the all-time high of $2,195 coincide.
Gold FAQs
Gold has played a key role in human’s history as it has been widely used as a store of value and medium of exchange. Currently, apart from its shine and usage for jewelry, the precious metal is widely seen as a safe-haven asset, meaning that it is considered a good investment during turbulent times. Gold is also widely seen as a hedge against inflation and against depreciating currencies as it doesn’t rely on any specific issuer or government.
Central banks are the biggest Gold holders. In their aim to support their currencies in turbulent times, central banks tend to diversify their reserves and buy Gold to improve the perceived strength of the economy and the currency. High Gold reserves can be a source of trust for a country’s solvency. Central banks added 1,136 tonnes of Gold worth around $70 billion to their reserves in 2022, according to data from the World Gold Council. This is the highest yearly purchase since records began. Central banks from emerging economies such as China, India and Turkey are quickly increasing their Gold reserves.
Gold has an inverse correlation with the US Dollar and US Treasuries, which are both major reserve and safe-haven assets. When the Dollar depreciates, Gold tends to rise, enabling investors and central banks to diversify their assets in turbulent times. Gold is also inversely correlated with risk assets. A rally in the stock market tends to weaken Gold price, while sell-offs in riskier markets tend to favor the precious metal.
The price can move due to a wide range of factors. Geopolitical instability or fears of a deep recession can quickly make Gold price escalate due to its safe-haven status. As a yield-less asset, Gold tends to rise with lower interest rates, while higher cost of money usually weighs down on the yellow metal. Still, most moves depend on how the US Dollar (USD) behaves as the asset is priced in dollars (XAU/USD). A strong Dollar tends to keep the price of Gold controlled, whereas a weaker Dollar is likely to push Gold prices up.
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