Gold Weekly Prediction: As attention turns to CPI, XAU/USD is still sensitive to US yields.

Oct 9, 2022
VOT Research Desk

Key News – Insights and Analysis

The Market Perspective:

Gold ultimately closed the week in the black for the second week in a row.

To entice buyers once again, XAU/USD has to stabilize over $1,700.

The important publication for the following week will be US September CPI inflation statistics.

Gold managed to extend its gains from the previous week and surged significantly on Monday. Tuesday’s break above $1,700 attracted technical buyers, and XAU/USD reached $1,730 in the middle of the week, its highest level since September 12.However, the pair lost a lot of its weekly gains as a result of renewed dollar strength ahead of the weekend.

The US inflation data for September may elicit a significant market reaction and assist the precious metal in determining its subsequent course. Gold gained momentum as a result of the improving mood in the market at the beginning of the week. This made it difficult for the dollar to find demand. In the meantime, another leg lower in global bond yields occurred as a result of the UK government’s decision to halt the planned elimination of the 45% tax on high earners.

The benchmark 10-year US Treasury bond yield decreased by nearly 5% on Monday, resulting in the largest one-day gain for XAU/USD since March. The ISM’s September data, which was made public during American trading hours, showed that employment was falling while manufacturing sector price pressures continued to ease.

The financial markets remained dominated by risk flows, and the dollar sell-off gained momentum.

The yellow metal rose above $1,700, attracting technical buyers, and reached a new multi-week high of $1,730 despite the fact that the US Dollar Index (DXY) lost more than 1% on the day. It is also important to note that a rise in global stock prices was fueled by the Reserve Bank of Australia’s (RBA) decision to raise its policy rate by only 25 basis points during the Asian session.

The impact of the RBA’s dovish hike on the market pricing of the Fed’s rate outlook is reflected in the CME Group FedWatch Tool’s probability of a 75 bps Fed rate hike in November, which has decreased to 50%

.

Gold entered a consolidation phase midway through the week after gaining nearly 4% in the first two days of the fourth quarter. In contrast to the market’s expectation of 200,000, private sector employment in the US increased by 208,000 in September, according to ADP. In addition, the ISM Services PMI survey revealed that service sector input inflation continued to rise strongly.

More importantly, the Employment Index component increased to 53 in September, significantly exceeding the analysts’ estimate of 49.6.Positive data releases prevented XAU/USD from regaining bullish momentum, which helped the DXY stage a rebound.

During Thursday’s European trading hours, markets remained relatively quiet, and gold fluctuated around $1,720.The yellow metal remained on the back foot throughout the second half of the day as the 10-year US T-bond yield continued to rise as a result of hawkish remarks made by Fed officials.

Raphael Bostic, president of the Atlanta Fed, stated that the Fed’s fight against inflation was likely still in its infancy, and Mary Daly, president of the San Francisco Fed, reiterated that they will raise rates into restrictive territory and maintain them there for some time. Last but not least, Neel Kashkari, president of the Minneapolis Fed, reminded markets that the US central bank was “quite a ways away” from a pause in policy tightening.

Friday’s announcement from the US Bureau of Labor Statistics showed that Nonfarm Payrolls increased by 263,000 in September, which was higher than the market’s consensus of 250,000, and that the unemployment rate fell to 3.5 percent from 3.7 percent in August. The positive jobs report fueled a rise in the 10-year US Treasury bond, which brought gold back to the $1,700 area ahead of the weekend.

The United States will not release any significant data early next week. On Wednesday, the minutes of the September policy meeting will be made available by the FOMC. Regarding the Fed’s policy outlook, this publication is unlikely to provide any significant surprises at this point. The hawkish dot plot reaffirmed the intention of policymakers to raise the policy rate above 4.5 percent and maintain that level next year.

The dollar could lose interest and open the door for another leg higher in gold if the statement demonstrates that rate-setters are more concerned about the growth outlook than markets were led to believe. However, the market reaction ahead of Thursday’s inflation report is likely to be brief.

It is anticipated that the annual Consumer Price Index (CPI) will rise to 8.5% in September from 8.3% in August. It is anticipated that the annual Core CPI, which excludes volatile energy and food prices, will rise to 6.5% from 6.3%.Investors are likely to place a greater emphasis on the core figure, and if it rises above 6.5 percent, yields could continue to rise.

On the other hand, XAU/USD should gain positive momentum if core inflation falls unexpectedly. Despite this, the Federal Reserve made it abundantly clear that they will not overreact to a single inflation reading, and the initial market reaction may subside unless it significantly affects the market pricing of the subsequent Fed action.

Retail Sales information for September will be made available by the US Census Bureau. Market participants will closely monitor the University of Michigan’s October Consumer Sentiment Survey ahead of the weekend, particularly the 5-year Consumer Inflation Expectation component, which decreased from 2.9 percent in August to 2.7 percent in September. The USD could be subjected to selling pressure if this data continues to fall.

Weekly Technical Indicators (Oct 10- 15)

                S3               S2          S1       Pivot       R1              R2           R3