If the market fails to move in the expected direction, it is more likely to move in the opposite direction. XAU/USD‘s rally following softer inflation data proved short-lived. The precious metal is back under bearish pressure. Let’s discuss this topic and outline a trading plan.
The article covers the following subjects:
Major Takeaways
- Gold reacted sharply to the CPI and PPI reports.
- The precious metal remains sensitive to the Fed’s interest rate outlook.
- Central banks may sell gold reserves.
- A move above 4,065 would provide a buying opportunity.
Weekly Fundamental Forecast for Gold
What rises fast can fall just as hard. Gold has dropped 26% from the record highs reached in January, making the second quarter its worst since 2013. Morgan Stanley notes that since 1960, the precious metal has lost a quarter of its value or more only four times before. This is now the fifth such decline, and XAU/USD risks extending its sell-off. TD Securities believes that speculative traders remain reluctant to build short positions, but a drop below $3,790 per ounce could trigger a wave of selling.
The still-strong US dollar and elevated Treasury yields continue to create an unfavorable backdrop for gold. This reflects rising expectations of tighter Federal Reserve policy following the renewed conflict in the Middle East. Additional pressure comes from concerns that Brent’s rally could force central banks in oil-importing countries to sell gold reserves to support their currencies.
Gold and US Dollar Performance
Source: Bloomberg
Against this backdrop, the US consumer and producer price reports provided temporary relief for gold. Softer inflation reduced the probability of a Fed rate hike in July to 10%, after those odds had briefly approached 50%. As a result, gold reacted positively to the June CPI and PPI releases. Unfortunately for bulls, that was not enough to lift XAU/USD away from the psychologically important 4,000 level.
Gold’s Reaction to US Inflation Data
Source: Bloomberg
If the market fails to move in the direction investors expect, it is more likely to move the opposite way. No one knows whether slower consumer price growth in June marked the end of the inflation uptrend or whether inflation will soon return to May’s peak. In any case, unless inflation moves closer to the Fed’s 2% target, the central bank is likely to begin a tightening cycle. That would be negative for non-yielding assets such as gold.
The decline in XAU/USD could accelerate if the sell-off in US technology stocks is reinforced by fears of aggressive Fed tightening. Gold often serves as a source of liquidity during periods of market stress, as investors sell it to meet margin calls on equity positions. That is why declines in the S&P 500 frequently coincide with sharp losses in XAU/USD.
The only factors likely to support gold would be a swift resolution of the Middle East conflict or a decline in Brent prices, even if the conflict continues. Under those circumstances, markets could return to the view that the inflation spike is temporary, reviving expectations of Fed rate cuts later this year.
Weekly Trading Plan for XAU/USD
At the moment, that scenario appears unlikely. A decline below $3,950 per ounce could accelerate the downtrend and provide a selling opportunity. Long positions may be considered again only after XAU/USD rises above 4,065.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of XAUUSD in real time mode
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