Gold Weekly Forecast: Geopolitics and US inflation report could trigger next directional movement

• Gold staged a decisive rebound following the bearish action seen in the first half of the week.
• XAU/USD technical outlook suggests that the bullish bias remains intact.
• Investors await US inflation data while keeping an eye on geopolitics.

Gold (XAU/USD) suffered heavy losses at the beginning of the week as a combination of factors triggered a broad market selloff. The metal, however, recovered sharply in the second half of the week and stabilized comfortably above $2,400. Market participants await July inflation data from the US for the next directional clue.  

Gold fluctuates wildly as investors adapt to a changing market environment

Gold failed to benefit from escalating geopolitical tensions at the beginning of the week and declined sharply. The unwinding of Japanese Yen (JPY) carry trade, growing fears over a recession in the US and heightened concerns about a deepening conflict in the Middle East triggered a global market selloff on Monday, causing a variety of financial assets, except for the JPY, to suffer heavy losses.

After losing more than 1% on Monday, Gold struggled to find a foothold on Tuesday. Although many assets retraced a portion of Monday’s decline, XAU/USD continued to push lower as the benchmark 10-year US Treasury bond yield staged a decisive rebound, rising nearly 3% on a daily basis. 

Gold managed to limit its losses on Wednesday but investors’ focus shifted to risk-sensitive assets on easing concerns over a continuation of the unwinding of the JPY carry trade. Bank of Japan (BoJ) Deputy Governor Shinichi Uchida noted that they will refrain from hiking the policy rate when markets are unstable, noting they must maintain the current degree of monetary easing for the time being.

In the absence of high-impact data releases and fresh geopolitical developments, XAU/USD attracted technical buyers after rising above $2,400 early Thursday and continued to stretch higher on Friday.

Gold investors could take large positions based on US inflation data

Next week’s economic calendar will feature July inflation data from the US. The Consumer Price Index (CPI) is forecast to rise 0.2% on a monthly basis and the core CPI, which excludes volatile food and energy prices, is also seen increasing 0.2% in the same period. On a yearly basis, the headline CPI inflation is forecast to edge lower to 2.9% from 3% in June.

The CME FedWatch Tool shows that markets are pricing in a more-than-50% probability of a 50 basis points (bps) Federal Reserve (Fed) rate cut in September. In case the monthly core CPI rises more than forecast, investors could reassess the probability of a 50 bps cut in September and help the USD gather strength with the immediate reaction. On the flip side, a reading at or below the market expectation in this data could weigh on the USD, opening the door for another leg higher in XAU/USD.

On Thursday, the US Census Bureau will publish the monthly Retail Sales data for July. After remaining unchanged in June, Retail Sales are forecast to rise 0.3% on a monthly basis. Although this data is usually ignored by investors, a significant diversion from the market consensus could impact the USD’s valuation in the near term. A noticeable increase could ease concerns over a recession in the US and weigh on XAU/USD by supporting the USD, while a negative print could have the opposite effect.  

In the meantime, market participants will continue to pay close attention to headlines surrounding the Iran-Israel conflict. Generally, Gold becomes one of the go-to assets when geopolitical tensions escalate. This past week’s action, however, showed that other factors have been causing traditional inter-market correlations to weaken. Hence, it might be risky to bet on a Gold rally even if next week’s developments point to a deepening crisis in the Middle East.

Gold technical outlook

After briefly falling below 50 on Tuesday, the Relative Strength Index (RSI) indicator on the XAU/USD daily chart rose toward 60 in the second half of the week, reflecting sellers’ hesitancy. On the upside, $2,470-$2,480 (mid-point of the ascending regression channel coming from mid-February, static level) aligns as the first resistance area before $2,500 (psychological level). In case Gold stabilizes above $2,500 and confirms that level as support, the upper limit of the ascending regression channel coming from mid-February could be seen as the next bullish target at around $2,580.

On the downside, immediate support is located at $2,410-$2,400 (20-day Simple Moving Average (SMA), psychological level) before $2,370 (50-day SMA) and $2,350 (100-day SMA).