Gold Prices Coil Up For Breakout. Will US Inflation Data Be The Trigger?

[MongiIG]

GOLD PRICE OUTLOOK:

• All eyes on US CPI report as gold prices take cues from real interest rates
• Data beckoning a more hawkish Fed response may pressure bullion lower
• Sellers might look for a close below $1778/oz for breakdown confirmation

Gold prices began a structural advance in September 2018 as the pickup in economic growth from early 2016 peaked, marking the end of the Fed’s rate-hike cycle and driving a parallel drop in real interest rates. The non-yielding metal grows more attractive as a store of value for investors as the return on cash declines.

As it happened, real rates dropped to 0 percent by late 2019 and raced into negative territory at the onset of the Covid-19 pandemic as the Fed unleashed aggressive stimulus to prevent a credit crisis. Not surprisingly, this was drove bullion prices sharply higher.

The rise was capped in August 2020 as the US central bank signaled that it was done expanding its stimulus program. That changed the object of speculation from how policymakers might ease further to when tightening would commence. Appropriately enough, real yields found a bottom simultaneously.

Gold price chart created using TradingView

Since then, a choppy range has prevailed as traders and policymakers alike attempt to divine next steps. The second half of 2021 marked a pointedly hawkish shift in Fed rhetoric as rapidly accelerating inflation appeared stickier than a mere ‘transitory’ by-product of recovery from Covid-triggered economic lockdowns.

Nominal yields have surged against this backdrop, but priced-in inflation expectations have grown faster and thereby kept real rates pinned in place. This has allowed gold to sustain store-of-value appeal and hold up even as it is unable to make further upside progress.

US CPI DATA IN FOCUS AS TRADERS WEIGH FED IMPACT ON REAL RATES

The spotlight now turns to December’s US CPI report. Core price growth is seen accelerating to 5.4 percent on-year, the fastest in 30 years. The headline number is seen hitting 7 percent on-year for the first time since 1982. Traders will be keen to weigh up any deviations as well as the make-up of the rise.

Leading ISM survey data suggests price pressures have eased in the manufacturing sector – consistent with other evidence suggesting supply chains are on the mend – while service-sector inflation remains near recent highs. That may speak to the stickiness of wage growth, revealed to be hotter than expected last week.

CPI data that underpins this narrative – that is, that the locking-in of brisk wage gains on the service side, the biggest part of the US economy, will keep inflation elevated – may beckon a sterner Fed. This might cap expectations for reflation to accelerate and boost nominal yields, lifting real rates at gold’s expense.

 

GOLD TECHNICAL ANALYSIS – COILING UP FOR A BREAKOUT?

Consolidation in a narrowing range below the 1834.14-49.64 zone continues. A break above this barrier’s upper boundary may expose resistance capped at 1877.15. Alternatively, a close below the January swing low at 1778.50 would break 5-month rising trend line. A test of support anchored at 1750.78 might follow.

Gold price chart created using TradingView

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Written by Ilya Spivak, Head Strategist, APAC for DailyFX. 12th Jan 2022.