- Risks for Gold remain tilted to the downside, but the rebound from $1,900 offers hope for the bulls.
- US data continues to show a resilient US economy, supporting the Greenback.
- A rebound in XAU/USD could extend to $1,950; higher levels would require a weaker Dollar.
Gold tested the $1,900 area this week, influenced by the latest US economic reports, but it managed to hold above and rebounded, erasing weekly losses and reaching the $1,930 zone. The overall bias remains tilted to the downside, with the strong US Dollar weighing on the yellow metal. Next week's focus is on central banks, including the Federal Reserve's (Fed) decision. However, not many changes are expected, and market dynamics might remain unchanged, which is unfavorable for Gold.
What Gold needs to strengthen is a change in the market narrative. The current scenario, where the US economy is outperforming, warrants the expectation that the Fed can maintain interest rates at current levels (or even higher if inflation continues to rebound) for an extended period of time. Until that narrative changes, any recoveries in XAU/USD would be viewed as unsustainable from a fundamental perspective.
A resilient US economy and the ECB's last hike
On Wednesday, it was announced that the US Consumer Price Index (CPI) rose by 0.6% in August, in line with expectations. The annual rate also increased from 3.2% in July to 3.6%. The positive news was the slowdown in the core annual rate, which decreased from 4.7% to 4.3%. The following day, data showed the Producer Price Index (PPI) rebounded more than expected, reaching an annual rate of 1.6% from 0.8%. The core PPI inflation showed the expected slowdown, decreasing from 2.4% to 2.2%.
Additionally, US data on Thursday revealed a resilient US consumer, with Retail Sales rising by 0.6% in August. The weekly jobless claims report exceeded expectations, with Initial Claims rising marginally from seven-month lows to 220,000 and continuing claims at 1.68 million near recent lows. On Friday, the NY Empire Manufacturing Index surged to 1.9 from -10.
The data from the US indicates that the economy is not currently heading towards a hard or soft landing. The labor market is softening but far from hinting at a recession. The economic context allows for more rate hikes from the Fed if policymakers decide to do so. Inflation data from this week showed no immediate need for further action, but it is insufficient to remove the hawkish bias.
Gold experienced a rebound triggered by the European Central Bank's decision. Despite raising rates by 25 basis points to record highs, the signals indicating that it was likely the last hike in the current tightening cycle prompted market actions, pushing the Euro and Eurozone yields lower. This favored Gold and helped it maintain levels above $1,900.
Equity markets rebounded, supported by the ongoing strength of the US economy and stabilization signs from China. If positive tone holds, it could further help Gold by boosting commodity prices and weakening the US Dollar. However, government bond yields need to remain stable for the yellow metal to benefit significantly.
Focus turns to the FOMC
The key event will be the Fed's decision on Wednesday. The consensus is for the central bank to keep interest rates unchanged. It would be an enormous surprise if the outcome of the meeting is different. With the economy still robust but showing signs of softening in the labor market and inflation slowing down (despite the headline CPI in August), there is no need to shock the markets.
Market participants will closely watch the tone of the Fed's statement and Chair Jerome Powell's comments. The central bank will likely maintain a hawkish tone, keeping the doors open for more action if needed and not signaling any rate cuts soon. Such a scenario could turn the FOMC meeting into a non-event with limited impact.
If the Fed tilts the tone, even modestly, to less hawkish or dovish, and other central banks do the same, government bond yields could decline sharply, offering a nice boost to XAU/USD. The biggest hope for Gold bulls next week lies in the actions of central banks.
The most important report regarding economic data will be the preliminary Global PMIs due on Friday, providing the first glimpse of economic activity during September. Positive numbers could contribute to improving the market’s mood, modestly supporting gold. A negative surprise from the PMIs could boost it even further as it would likely lead to higher bond prices.
Gold price technical outlook
The short-term outlook for Gold remains unclear. While the rebound on Friday alleviated some bearish pressure, Gold is still below the 20-week Simple Moving Average (SMA), although it has managed to stay above $1,900. If the recovery continues, XAU/USD could potentially extend towards the $1,950 area, which presents a strong barrier. A weekly close above $1,950 would indicate a positive development, suggesting further upside potential. Conversely, a drop below $1,910 would hint at further weakness, with the following key support at $1,880. A break below that level could target the $1,860 zone.
Friday's upward momentum could persist in the short term and intensify if Gold breaks above $1,950. On the other hand, the $1,900 area remains a key threshold, and a downside break could lead to a test of August lows.
Gold price forecast poll
According to the FXStreet Forecast Poll, a majority of experts anticipate that Gold prices will rise. The average price for the upcoming week is projected to be $1,935, while the average price for one month ahead is expected to reach $1,957. The average price for a quarter is estimated to be $1,975. However, some experts predict Gold to trade below $1,900 in three months.
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