Gold prices’ (XAUUSD) performance is currently under a magnifying glass, with the precious metal’s recent rally taking a pause as anticipation built ahead of the critical US Consumer Price Index (CPI) report.
The anticipation has injected a sense of caution among investors, given the report’s potential implications on the Federal Reserve’s monetary policy direction. An inflation figure that exceeds forecasts could dampen the likelihood of near-term rate cuts, potentially pressuring gold prices due to its inverse relationship with real interest rates. Conversely, a softer inflation reading may reinforce the market’s expectations for a Fed rate cut as early as June, which would likely bolster gold’s appeal as a non-yielding asset.
The market sentiment is a complex weave of expectations, with the CPI data acting as a potential pivot point. Investors are currently hedging their bets, evidenced by a slight retreat in gold prices, yet the underlying bullish sentiment—spurred by the possibility of rate cuts—continues to underpin the metal’s appeal.
Technical Analysis
The 4-hour chart shows that the overall technical structure leans bullish. Gold sits comfortably above the critical moving averages [20-SMA (green line), 50-SMA (blue line), 100-SMA (orange line)], with the 20-SMA providing immediate support. Therefore, the all-time high of $2,192.69/ounce could come into play in the session should the 20-SMA provide significant support. A sustained break above the all-time high of $2,192.69/ounce, backed by significant volume, could propel prices towards the 23.060% Fibonacci extension level ($2,222.41/ounce) and even the 38.20% Fibonacci extension level ($2,239.29/ounce).
The RSI at 71.72 indicates overbought conditions, making gold vulnerable to a correction if the CPI report disappoints. A hotter inflation reading could exacerbate the selloff, with the 23.60% Fibonacci retracement level ($2,148.27/ounce) acting as the first line of defence. A confirmed breakdown below this level could expose lower support zones at the 38.20% Fibonacci retracement level ($2,118.98/ounce) and the 50.00% Fibonacci retracement level ($2,096.32/ounce).
Summary
The anticipation surrounding the US CPI report has imbued the gold market with a sense of cautious optimism. While the metal’s price action hints at underlying strength, the inflation data presents a binary outcome with significant implications. A cooler CPI reading aligns with the market’s rate cut expectations, potentially fuelling another leg up in gold’s rally. In contrast, a hotter-than-expected reading might trigger a correction, with initial support at $2,148.27.
Sources: TradingView, Trading Economics, Dow Jones Newswire, Reuters.
Piece written by Mfanafuthi Mhlongo, Trive Financial Market Analyst
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