Trade Of The Week: What Next For Gold As Focus Shifts To US CPI?

Gold kicked off the week on a steady note despite last Friday’s blowout jobs report cooling recession fears and reinforcing expectations for more aggressive Federal Reserve interest rate hikes.

An appreciating dollar and jump in Treasury yields following the strong than expected data initially dragged the precious metal from a one-month peak. However, prices seem to be making their way back towards this level ahead of another big week for gold.

In July, the US economy created 528,000 jobs, well above the forecast of 250,000 while the unemployment rate fell to 3.5% as labour market conditions tightened. With the strong jobs report boosting the dollar and supporting the case for another jumbo Fed rate hike, this could spell more trouble for zero-yielding gold.

It is worth keeping in mind that before the NFP upside surprise, gold drew ample support from geopolitics risks, recession fears, reduced Fed hike bets, and a weaker dollar. In fact, the precious metal rallied over the last three weeks on these themes with the latest geopolitical tensions and global growth concerns stimulating appetite for the safe-haven asset.

Taking a quick look at the technicals, gold remains in a bullish trend on the daily charts with the current upside momentum seen taking prices towards $1809. However, if the fundamentals start to empower bears – things could get ugly. 

All eyes on US inflation report

Inflation in the United States accelerated 9.1% in June, its highest level in 40 years!

According to Bloomberg, July’s inflation data is expected to show annual inflation cooling to 8.7%. Should expectations become reality, this could fuel speculation around inflation peaking. Now when factoring the market obsession and reactivity to anything relating to rising prices, it may be wise to fasten your seatbelts and prepare for a bumpy ride.

Another jump in US consumer price inflation is likely to solidify expectations around the Federal Reserve hiking rates by another 75 basis points in September. Traders are currently pricing in a 78% probability the Fed continues the pace of jumbo rate hikes for its decision in September. Given gold’s zero-yielding nature, this is certainly bad news and could result in steep downside losses.

However, if the inflation report meets or misses expectations – this could raise hopes over consumer prices plateauing. Such a development has the potential to encourage the Fed to dial back on its aggressive approach toward rates. If the dollar weakens and Treasury yields fall on this development, gold could be given more room to fight back.

Gold speeding into a brick wall?

Gold bulls remain in the driving seat with their feet on the accelerator, clawing back losses from Friday’s selloff. Prices are trading around the $1785 level which is just below the 50-day Simple Moving Average. A strong breakout above this point could encourage an incline towards $1809 and potentially $1840 – a level below the 100 and 200-day SMA. However, if $1809 proves to be a tough nut to crack – prices may slip back towards $1785 and $1752, respectively.

Zooming in on the weekly charts, prices remain in a bearish channel. However, bulls are making their presence known and have been in control for the past 3 weeks. The upside momentum could take prices towards $1830 and $1875, respectively. A decline below $1740 is seen triggering a selloff towards $1685 – a level above the 200-week Simple Moving Average.

Gold Federal Reserve Dollar inflation Rates