Gold Price Weekly Forecast: US inflation report to trigger next directional move

Gold price started the new week in a calm manner but managed to post three straight daily gains before losing its traction on Thursday amid the action in the US Treasury bond yields. Nevertheless, XAU/USD ended the week virtually unchanged at around $1,860. The highly-anticipated inflation data from the US could influence the market pricing of the Federal Reserve’s (Fed) rate outlook and provide a directional clue to the pair next week.

What happened last week?

In the absence of high-tier macroeconomic data releases, XAU/USD fluctuated in a tight range on Monday but short-covering following the sharp decline witnessed ahead of the weekend allowed the pair to make a technical correction.

On Tuesday, hawkish Fed commentary helped the US Dollar stay resilient against its rivals and limited XAU/USD’s upside. Minneapolis Fed President Neel Kashkari noted that his terminal rate projection was still around 5.4% following the impressive January jobs report and noted that they haven’t yet made enough progress to declare victory in the battle against inflation. 

In an interview with The Economic Club of Washington, D.C., “we probably need to do further interest rate increases,” FOMC Chairman Jerome Powell noted. The Chairman also acknowledged that they expect 2023 to be a year of significant declines in inflation. The CME Group FedWatch Tool’s probability of two more 25 basis points (bps) rate hikes in March and May stood around 70%, suggesting that these comments failed to influence the market pricing of the Fed rate outlook.

Following Wednesday’s indecisive action, XAU/USD came under bearish pressure late Thursday and erased all of its weekly gains. As the US 10-year and the US T-bond yield curve inversion continued to deepen, safe-haven flows dominated the markets and Gold price registered its lowest daily close in a month slightly below $1,860, losing nearly 1% on the day.

Meanwhile, New York Fed President John Williams noted that a peak rate of 5%-5.25% was still a reasonable view and Richmond Fed President Thomas Barkin said that data continue to push back recession risks, allowing hawkish Fed bets to lift yields.

Finally, the monthly data published by the University of Michigan revealed on Friday that the Consumer Confidence Index rose to 66.4 in February's flash estimate from 65 in January. Additionally, the year-ahead inflation expectations component rebounded to 4.2% from 3.9% in January and helped the USD hold its ground ahead of the weekend.

Next week

The US Bureau of Economic Analysis (BEA) will publish the January inflation report on Tuesday and the market action is likely to remain subdued ahead of this event.

The Consumer Price Index (CPI) is forecast to decline to 5.8% on a yearly basis from 6.5% in December. The Core CPI, which excludes volatile food and energy prices, is projected to decline to 5.3% from 5.7%. Since base effects are likely to distort annual readings, market participants are likely to react to the monthly Core CPI, which is forecast to rise by 0.5% following December’s 0.4% increase.

The market positioning, as mentioned above, suggests that there is more room on the upside for the US Dollar in case the monthly Core CPI prints a stronger-than-expected increase in January. On the other hand, a print at or below 0.3% could revive the ‘Fed pivot’ narrative and provide a boost to XAU/USD by weighing heavily on the US Dollar and the US T-bond yields. 

In December, the ‘services less energy services’ component of the CPI came in at +0.5%. Since this is the specific component of inflation that the Fed pays close attention to, a big increase in January, around 0.7% or 0.8%, could provide a boost to the US Dollar even if the Core CPI comes in near the market expectation and vice versa.

On Wednesday, January Retail Sales will be featured in the US economic docket but it’s unlikely to trigger a noticeable market reaction. On Thursday, January Housing Starts and Building Permits will be looked upon for fresh impetus. The real estate market has been struggling with rising interest rates weighing on demand. Housing Starts are forecast to rebound and rise by 0.6% following December’s contraction of 1.4%. A negative print could hurt the US Dollar while an unexpected increase could have the opposite impact but the market reaction to this data should remain short-lived. 

In the meantime, comments from Fed officials will be watched closely by market participants after the inflation data. The reaction in the bond market could provide a directional clue to XAU/USD due to the pair’s inverse correlation with yields, especially the 10-year reference.

Gold price technical analysis

XAU/USD near-term technical picture points to a neutral/bearish bias. The Relative Strength Index (RSI) indicator on the daily chart moves sideways slightly below 50 but the 50-day Simple Moving Average (SMA) stays intact at around $1,855.

A daily close below $1,855 could bring in additional sellers and open the door for an extended slide toward $1,830 (Fibonacci 38.2% retracement level of the latest uptrend). In case the latter support fails and starts acting as resistance, Gold price could stretch lower toward $1,800.

On the upside, $1,880 (Fibonacci 23.6% retracement) aligns as key support ahead of $1,900/$1,905 (psychological level, 20-day SMA). Once the pair clears that second hurdle, it could aim for $1,920 (static level, former support).

Gold price forecast poll

The FXStreet Forecast poll points to a slightly bullish bias in the one-week outlook with the average target sitting at $1,883. Half of the polled experts expect XAU/USD to continue to rise over the next four weeks and four months.