Gold Price Analysis: XAU/USD continues to trade sideways in $1820 area as dollar falls post-hot US CPI

In wake of a broadly hotter than expected US Consumer Price Inflation (CPI) report, spot gold (XAU/USD) prices continue to trade sideways in the $1820 area where it trades broadly flat on the day. In a somewhat unintuitive reaction to headline CPI rising in line with expectations to 7.0% YoY, its highest levels since June 1982, and Core CPI rising above expectations to 5.5%, the US dollar has come under pressure. The data, which comes on the heels of last Friday’s jobs report which showed the unemployment rate falling under 4.0%, strongly supports the case for Fed tightening this year, even if much of the recent pressures come from used car prices.

But market participants appear to be taking the view that positioning in the US dollar has in recent weeks become too bullish, hence the downside in both. For reference, the DXY recently fell under the 95.50 mark to hit its lowest level since mid-November. The dollar’s case isn't being helped by the fact that, in wake of the data, 10-year TIPS yields are going sideways in the -0.85% area, having dropped back about 10bps since Fed Chair Jerome Powell’s not as hawkish as feared comments on Tuesday. The combination of a weakening dollar plus subdued real yields would typically be a positive for spot gold prices.

However, resistance in the form of a downtrend from the 2 and 5 January highs appears to have blocked XAU/USD from pushing higher. Perhaps if the dollar continues to crater and real yields build on Tuesday’s pullback from recent highs then spot gold can see a bullish breakout a test last week’s highs in the $1830 area. It is worth bearing in mind that many rate and FX strategists think that in the medium to long-term as the Fed tightens monetary policy, the trajectory for the dollar and US real yields will ultimately be higher. That suggests traders should guard against the building of medium-term bullish positions in gold and should instead be nimble if they are going to trade on the long side.