Gold edges lower amid renewed USD buying; downside seems cushioned ahead of US CPI report
- Gold enters a consolidation phase as bulls turn cautious ahead of the key US CPI report.
- Fed independence fears and rate cut bets continue to lend support to the commodity.
- Geopolitical uncertainties favor the XAU/USD bulls and back the case for further gains.
Gold (XAU/USD) remains on the defensive below the $4,600 mark heading into the European session on Tuesday, though the downside seems limited amid a supportive fundamental backdrop. The US Dollar (USD) attracts some buyers following the previous day's decline and turns out to be a key factor acting as a headwind for the commodity. That said, concerns about the US Federal Reserve's (Fed) independence might keep a lid on any meaningful USD appreciation. This, along with bets for more Fed rate cuts, might continue to benefit the non-yielding yellow metal.
Apart from this, persistent geopolitical uncertainties should help limit the downside for the safe-haven Gold. Traders might also refrain from placing aggressive directional bets and opt to wait for the release of the latest US consumer inflation figures later today. The crucial data will play a key role in influencing market expectations about the Fed's future rate-cut path, which will drive the USD demand and provide a fresh impetus to the XAU/USD pair. Nevertheless, the fundamental backdrop suggests that any corrective decline might still be seen as a buying opportunity.
Daily Digest Market Movers: Gold is undermined by modest USD uptick ahead of US CPI
- A Trump administration criminal probe into Federal Reserve Chair Jerome Powell fueled uncertainty about the US central bank's independence and pushed the safe-haven Gold to a fresh all-time high at the start of this week.
- Fed Chair, in a rare statement, said that the threat of criminal charges against him is a consequence of US President Donald Trump's anger over the central bank's refusal to cut interest rates despite repeated public pressure.
- Geopolitical tensions also remained elevated after Trump told reporters that he was considering a range of options, including potential military action, in response to Iran's crackdown on mass anti-government demonstrators.
- Adding to this, Trump announced late Monday that any country doing business with Iran will face a new tariff of 25% on its exports to the US. This turns out to be another factor acting as a tailwind for the XAU/USD pair.
- The closely-watched US Nonfarm Payrolls report released last Friday backed the case for potentially stagnant policy in the first quarter. Traders, however, are still pricing in two more interest rate cuts by the Fed later this year.
- The outlook, in turn, fails to assist the US Dollar in attracting any meaningful buyers and further lends support to the commodity. The XAU/USD bulls, however, opt to wait for the release of the latest US consumer inflation figures.
- The headline US Consumer Price Index (CPI) is expected to have risen by 0.3% in December, and the yearly rate is seen holding steady at 2.7%. Excluding Food and Energy, the core CPI is estimated to edge higher to 2.7% YoY.
- Any significant divergence in comparison to the broader consensus would lead to a shift in the likelihood of a Fed rate cut at the January 28 meeting, which, in turn, would infuse volatility around the USD and the precious metal.
Gold ascending channel formation backs the case for further gains
The ascending channel from $3,920.24 guides the uptrend, with resistance near $4,656.02. The 50-day Simple Moving Average (SMA) trends higher, underscoring firm buying bias. The XAU/USD pair holds above the SMA, preserving bullish control. The Moving Average Convergence Divergence (MACD) line stands above the Signal line, and both lie in positive territory. The widening positive histogram suggests strengthening momentum, while the Relative Strength Index (RSI) prints at 70.26 (overbought), which could cap gains into the channel ceiling.
Trend conditions remain favorable while the 50-day Simple Moving Average (SMA) rises and price respects it, with the SMA at $4,255.80 acting as nearby support. The MACD above zero reinforces the bullish tone, though momentum could cool as the RSI holds in overbought territory. A pullback would be expected to remain contained above the SMA, whereas a close above the channel cap would open the path for continuation.
(The technical analysis of this story was written with the help of an AI tool.)
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
Author
Haresh Menghani
FXStreet
Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.
