Gold Price Weekly Forecast: XAU/USD could gain traction on a 'Santa rally'

Gold price fluctuated wildly throughout the week as investors assessed the US inflation report, the Federal Reserve’s policy outlook and its potential impact on the global economy. Next week’s economic calendar will not be offering any high-impact data releases and thinning trading conditions into the holiday season could make it difficult for the precious metal to make a decisive move in either direction.

What happened last week?

Although China took additional steps toward reopening at the beginning of the week, Gold price struggled to gain traction with investors refraining from betting on an improving demand outlook ahead of the key macroeconomic data releases and central bank events. With the benchmark 10-year US Treasury bond yield building on the previous Friday’s recovery gains and rising above 3.6%, XAU/USD snapped a four-day winning streak and declined nearly 1% on Monday.

On Tuesday, the US Bureau of Labor Statistics reported that inflation in the US, as measured by the Consumer Price Index (CPI), declined to 7.1% on a yearly basis in November from 7.7% in October. More importantly, the Core CPI, which excludes volatile food and energy prices, rose by 0.2% on a monthly basis, marking the smallest one-month increase in core inflation since August 2021. The US Dollar came under heavy bearish pressure on soft CPI figures and the 10-year US yield lost nearly 4%, dropping below 3.5%. In turn, XAU/USD registered impressive gains and reached its strongest level in over five months at $1,824 before retreating toward $1,810 toward the end of the American session.

As expected, the US Federal Reserve decided to raise its policy rate by 50 basis points (bps) to the range of 4.25-4.5% following the December policy meeting. The revised Summary of Projections (SEP) showed that the median terminal rate projection rose to 5.1% from 4.6% in September’s SEP. Additionally, Core Personal Consumption Expenditures (PCE) inflation forecast for end-2023 got revised higher to 3.5% from 3.1% while the 2023 growth projection declined to 0.5% from 1.2%. With the initial reaction to the Fed’s hawkish dot plot, the 10-year US Treasury bond yield recovered toward 3.6% and caused XAU/USD to turn south.

During FOMC Chairman Jerome Powell’s press conference, however, the US Dollar struggled to preserve its strength and allowed Gold price to erase a large portion of its daily losses with XAU/USD closing the day above $1,800. Powell reiterated that historical records cautioned them strongly against premature loosening but acknowledged that the peak rate could come down if inflation data were to continue to soften.

The negative shift witnessed in risk sentiment provided a boost to the US Dollar on Thursday. The disappointing Retail Sales and Industrial Production data from China, combined with the Fed’s hawkish outlook, revived concerns over a global economic slowdown. With the US Dollar Index rising sharply and retracing the majority of the weekly decline, XAU/USD came under heavy bearish pressure and lost nearly 2% on the day.

Gold price staged a rebound on Friday as the US Dollar came under modest bearish pressure after the S&P Global PMI surveys showed that economic activity in the private sector contracted at an accelerating pace in early December.

Next week

The Conference Board will release the Consumer Confidence Index data for December on Wednesday. In November, the one-year inflation rate expectation component of the survey rose to 7.2% from 6.9% in October. Another increase in that component should help the US T-bond yields edge higher and weigh on XAU/USD and vice versa. On Thursday, the US economic docket will feature the final revision to the annualized third-quarter Gross Domestic Product (GDP) growth, which is unlikely to trigger a reaction since it’s expected to match the previous estimate of 2.9%. 

Ahead of the weekend, the US Bureau of Economic Analysis will publish the PCE Price Index figures for November. Markets expect the annual Core PCE inflation, the Fed’s preferred gauge of inflation, to decline to 4.6% from 5% in October. On a monthly basis Core PCE inflation is forecast to rise by 0.4%. In case the monthly figure comes in below the market consensus, Gold price could gain traction given the market feedback to soft CPI figures. Ahead of the Christmas holiday, however, trading conditions could thin out and cause the reaction to remain short-lived. On the other hand, a stronger-than-forecast monthly Core PCE inflation should have the opposite effect and weigh on XAU/USD.

Market participants will also pay close attention to risk mood. Following the dismal performance of Wall Street’s main indexes this past week, investors could look to take advantage of low prices, opening the door for the infamous ‘Santa rally.” In case major equity indices in the US start pushing higher, XAU/USD will gather bullish momentum.

Gold price technical outlook

The Relative Strength Index (RSI) indicator on the daily chart holds above 50 and XAU/USD stays near the 200-day SMA, pointing to a bullish bias. Moreover, the 20-day SMA stays intact following the sharp decline witnessed on Thursday.

In case Gold price stabilizes above $1,790 (200-day SMA) and confirms that level as support, it could test $1,800 in the short term before targeting $1,830 (Fibonacci 50% retracement of the long-term downtrend) and $1,860 (static level).

On the downside, $1,780/$1,775 area (Fibonacci 38.2% retracement, 20-day SMA) aligns as initial support before $1,740 (static level) and $1,720 (100-day SMA, 50-day SMA).

Gold price forecast poll

FXStreet Forecast Poll points to a neutral bias for Gold price on a one-week and a one-month view. The one-quarter outlook is bullish with the average target sitting at $1,840.