Trade Of The Week: Gold Eyes Key US Inflation Data

Gold is certainly glittering, gaining 2.3% in the first full trading week of 2023 alone.

The precious metal continues to draw ample strength from a softer dollar, falling Treasury yields, and growing expectations of a less hawkish Federal Reserve. Last Friday’s mixed US jobs report added fuel to the bullish momentum, resulting in a weekly close above resistance at $1860.

In our 2023 outlook, we discussed how gold could be one of the biggest winners this year due to the shifting market dynamics and fundamental themes. Well, it looks like bulls are wasting no time in marking their territory, pushing the precious metal to levels not seen since May 2022.

Regarding December’s jobs data, it offered conflicting signals as NFP exceeded expectations by rising 223,000k but wage growth slowed, and weekly working hours continued to fall. The slowing wage growth fuelled speculation around the Fed slowing its rate hikes – dealing a blow to the dollar which was already on the verge of a “death cross” technical pattern on the daily charts. Ultimately, this supported zero-yielding gold further.

Taking a quick peek at the technical picture, gold remains firmly bullish on the daily timeframe. The upside momentum could propel prices towards the psychological $1900 if the fundamentals remain in favour of bulls.

US Inflation report in focus

Inflation in the United States slowed for a fifth straight month to 7.1% in November, the lowest level since December 2021. Persistent signs of easing inflationary pressures in the world's largest economy have somewhat brightened the market mood and fuelled speculation around a less hawkish Fed.

According to Bloomberg, December’s inflation data is expected to show annual inflation cooling to 6.5%. Should expectations become reality, this will mark the sixth straight monthly decline and the lowest since October 2021. Given the market sensitivity to anything relating to inflation, this could result in explosive levels of volatility across financial markets.

More signs of falling inflation may fuel talks around the Federal Reserve veering to smaller rate hikes. Currently, traders are currently pricing in only a 27% probability of a 50-basis point rate hike in February. When considering gold’s zero-yielding nature, this further supports the bullish outlook.

Alternatively, a hotter-than-expected CPI report could revive aggressive rate hike bets as investors question whether inflation is truly plateauing. Such a development could see gold prices weaken as the dollar rebounds along with Treasury yields.

Other factors to watch out for...

Other than the highly anticipated US CPI report on Thursday, there are a couple of reports and Fed speeches this week that could influence gold prices.

On Monday, Atlanta Fed President Raphael Bostic will be under the spotlight. All eyes will be on Fed Chair Jerome Powell on Tuesday as he speaks during an international symposium at Riksbank in Stockholm. More Fed members are due to speak on Thursday with the US January consumer sentiment report on Friday ending the week. Should Fed members strike a hawkish note, this could weigh on gold prices. Alternatively, any whiff of caution, soft economic data or appearance of doves may boost gold’s allure.

Gold bulls switch into higher gear…

Gold bulls remain in a position of power with their feet pressed aggressively on the accelerator. Prices are firmly bullish on the daily timeframe with $1900 acting as the first key level of interest. A move above this level could encourage an incline towards $1920 and $1958, respectively. Should bulls run out of steam, prices may dip back below $1860 – opening the doors towards $1840, $1814, and $1800, respectively.

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