Gold Price Analysis: XAU/USD challenging key support ahead of US inflation, ECB

Update: Gold price is extending weakness into the third straight day on Thursday, testing the critical 21-DMA at 1883 support ahead of the all-important US inflation and ECB policy decision. The US CPI data is likely to hint at the Fed’s monetary policy path amid increased expectations of tapering, as inflation concerns mount. Meanwhile, the ECB could also indicate rolling back of emergency asset purchases while leaving the main policy unchanged. The outcome of these two key events is likely to have a significant impact on the financial markets and the US dollar price action, rocking gold price. The ECB decision is due at 1145 GMT while the US inflation data will drop in at 1230 GMT.

Read: US CPI May Preview: Inflation angst is coming

At the time of writing, Gold is trading at $1,891.26 and flat on the day having traded within a range of between $1,887.43 and $1,899.07 so far. 

The greenback was slightly offered on Wednesday with the focus being on central banks and inflationary pressures in the US. 

The European Central Bank meeting and the upcoming US Consumer Price Index are the main focus ahead of next weeks Federal Reserve outcome.

Both the ECB and US CPI are due on Super Thursday, and investors have adopted a wait-and-see attitude, leaving major currencies treading water. 

In fact, it has been the worst volatility in over a year in forex according to the DBCVIX USD Volatility Index:

With the ECB, traders will be on the lookout for clues of an imminent slowdown to its bond-buying program. Most observers are f the opinion that the ECB’s accelerated asset purchases will be extended through Q3 at this week’s meeting.  

Meanwhile, the Bank of Canada on Wednesday left its key interest rate unchanged.

The central bank reiterated its guidance that rates would remain unchanged until at least the second half of 2022. The decision is promising for the growth outlook on the commodities space and while gold is not directly correlated, from an inflationary standpoint, it stands to gain from global growth prospects. 

''Interest in precious metals has been supported by inflation-hedging appetite, and resurgent Chinese demand which ultimately set the stage for large scale CTA purchases, analysts at TD Securities argued. 

Meanwhile, with the US growth outlook in focus, the US JOLTS job openings came in very strong for April and the US growth outlook for the second quarter also remains strong.

The Atlanta Fed’s GDPNow model forecasts Q2 growth at 9.4% SAAR vs. 10.3% previously, while the New York Fed’s Nowcast model currently shows Q2 growth at a more modest 4.4% SAAR vs. 4.2% previously, analysts at Brown Brothers Harriman explained.   

''The New York Fed model just started estimating Q3 and it currently stands at 5.4% SAAR. Of note, Bloomberg consensus sees 9.2% growth in Q2, easing to 6.8% in Q3 and 4.8% in Q4, all in SAAR terms.''

The CPI data will be a keen event for traders. Further rises in inflation could raise concerns that the Fed will start to contemplate tighter monetary conditions, with a reduction in bond purchases the likely first move.

Meanwhile, on the trade front, the US and the EU are on the way to trade reconciliation. 

''Reports suggest that the two sides will start removing Trump-era tariffs on steel and aluminum and will try to resolve the festering Boeing-Airbus dispute.  While the matter of aircraft subsidies remains complicated, the shift towards negotiations and away from tariffs is a welcome change in tactics,'' analysts at Brown Brothers Harriman explained.   

With respect to the gold price, the analysts at TD securities argued that they ''are increasingly vulnerable to a near-term pullback as speculative flows are now slowing alongside physical flows, amid India's battle against Covid and as the collapse in SGE onshore spreads points to waning Chinese demand.''

''Notwithstanding, real rates remain well-behaved as easing inflation risk premium also supports lower nominal rates, which ultimately have kept gold prices from falling ahead of this week's highly anticipated CPI print.''

Gold technical analysis

Consolidating, but while above 1,857, it stays neutral to bullish.

With that being said, the M-formation on the daily chart does hold at the neckline, with the price stuck below the neckline resistance of 1,900, a case for a restest of daily dynamic support will be on the cards.  

Previous update 

Update: Gold (XAU/USD) bounces off intraday low towards $1,890 but stays depressed below $1,900 for the third consecutive day amid Thursday’s Asian session. Market’s anxiety ahead of the key US Consumer Price Index (CPI) and the European Central Bank (ECB) meeting exerts downside pressure on the gold prices of late. Also on the same line could be the Brexit headlines ahead of US President Joe Biden’s meddling into the key EU-UK issue. Furthermore, chatters over the US-led push to re-do detailed investigations in covid origins and the Britain-America ties to frame policies to increase Beijing’s hardships also weigh on the sentiment.

Amid these plays, US Treasury bond yields hold lower ground near March levels whereas stock futures remain indecisive after the mildly offered Wall Street benchmarks.

Given the likely escalation of the risk sensitivity before the crucial events, gold prices may extend the gradual run-up unless crossing the $1,900 key hurdle.