GOLD OUTLOOK & ANALYSIS
- Markets already pricing in weaker U.S. inflation, gold bid
- U.S. CPI and Fed officials in focus.
- Bearish divergence could see sharp pullback on daily XAU/USD should inflation remain high.
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XAU/USD FUNDAMENTAL BACKDROP
Gold is trading higher this morning ahead of the much anticipated U.S. CPI release later today (see economic calendar below). Expectations for both core (the Fed’s preferred measure) and headline inflation are lower compared to the prior November print and considering wage pressures are on the decline, many are looking for it to translate through to CPI. Fed speakers are also scheduled to speak around the inflation report and it will be interesting to see whether or not they change from their recent hawkish narrative in response to the actual data.
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Source: DailyFX Economic Calendar
Falling inflation has implications for the Fed and their interest rate hiking cycle moving forward. Looking at the Fed funds futures below, current market pricing shows an expectation for a 31.24bps rate hike in the February meeting but a softer inflation print could cement a 25bps increment and reduce the opportunity cost of holding bullion relative to a 50bps hike – hence why a decline would be supportive for gold prices (detrimental for the U.S. dollar) and vice versa.
FEDERAL RESERVE INTEREST RATE PROBABILITIES
GOLD PRICE DAILY CHART
Chart prepared by Warren Venketas, IG
The daily spot gold chart shows price action following an upward trajectory testing the 1880.00 psychological level which has held as resistance since June of 2022. Lower inflation would likely see gold push higher towards the 1900.00 handle while an elevated print could knock gold all the way back down to 1860.00 and beyond. Markets may have reacted too optimistically to the falling wage data seen in last week’s Non-Farm Payroll (NFP) report, and could feel the pinch should CPI disappoint to the upside.
The Relative Strength Index (RSI) continues to exhibit bearish/negative divergence which shows the oscillator move in the opposing direction to XAU/USD prices. Traditionally this phenomenon points to impending downside and may be catalyzed by elevated inflation figures.
IG CLIENT SENTIMENT: BULLISH
IGCS shows retail traders are currently distinctly LONG on gold, with 59% of traders currently holding long positions (as of this writing). At DailyFX we typically take a contrarian view to crowd sentiment however, due to recent changes in long and short positioning we arrive at a short-term upside bias.
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