Gold Price Forecast: XAU/USD faces rejection at key $1,834 level ahead of US inflation

Update: Gold price has turned south after facing rejection at the September highs of $1,834 on a couple of occasions, as the bulls take a breather ahead of the all-important US inflation data. Investors expected the US Consumer Price index (CPI) data to provide fresh hints on the Fed’s rate hike timing. The US annualized CPI is foreseen at 5.3% in October vs. 5.4% previous. Meanwhile, the US dollar is firming up amid persistent inflation worries, which have dented the investors’ appetite for risker assets.

Technically, gold price awaits a daily closing above $1,834 to unleash the additional upside, especially after the bullish breakout witnessed last Friday. Besides, the US inflation data, the focus shifts towards the next week’s Biden-Xi meeting. However, the Fed speculation will continue to lead the way.

Read: US inflation data unlikely to discourage gold bulls

In a quiet start to the day on Wednesday, the price of gold is sitting perched in a bullish territory around $1,830 and flat so far. The recent rally in gold paused on Tuesday as the market looks to key US inflation data from both the US and China. 

A sharp drop in real yields has supported the yellow metal this week as inflation expectations have risen notably. However, the central; bank's transitory mantra has also dialled back rate hike expectations which have weighed don the greenback and higher-yielding currencies, giving gold an edge. 

On Tuesday, risk sentiment weakened, the S&P 500 snapping an 8-day winning streak. Risk-sensitive currencies and bond yields fell, albeit without an obvious catalyst. The moves in the New York session came relatively late in the morning trade and some time after the PPI data hit the screens. The dollar oscillated in a tight range after data showed US Producer Prices increased solidly in October, indicating that high inflation could persist for a while amid tight supply chains related to the pandemic.

However, traders were cautious to move into dollars ahead of today's highly anticipated event in the Consumer Price Index (CPI) data considering how hot of topic inflation is for markets. Importantly for gold prices, fixed income markets remained strong.

Bond prices were supported by speculation over forthcoming dovish leadership as markets digested news that dovish Fed Governor Lael Brainard has been interviewed for the Fed’s chair position. This is fanning expectations that the Fed will turn dovish. Biden has four Fed board nominations to make this month, including the Chair and Vice-Chair.      

US bonds rallied and the curve bull flattened following a global bond rally in a risk-off shift in global sentiment. The 2-year government bond yields fell from 0.43% to 0.41%. The 10-year government bond yields fell from 1.49% to 1.41%.

Key events from Tuesday for gold

US PPI inflation data in October matched expectations at 0.6% MoM and 8.6% YoY, with the ex-food and energy measure steady at 6.8% YoY which is a record high. ''Large energy price gains in November, alongside worsening supply chain bottlenecks, suggest that the YoY gains will continue to rise into year-end, even as base effects dissipate,'' analysts at Westpac explained. 

As for Fed speakers, St. Louis Fed president James Bullard repeated that the Fed may have to move faster if inflation pressures persist. San Francisco Fed president Mary Daly expressed a more dovish stance, saying that given the high degree of uncertainty in the labour market and on inflation, the best approach is to hold steady. Fed's Neel Kashkari said supply and demand shocks are expected to be temporary.

Key events for the day, US CPI

The key events for the day are with China's Oct CPI and PPI and then in the New York sessions, US Oct CPI which should show the fastest inflation since 1990. ''October’s CPI result is expected to be driven by a lift in core prices,'' analysts at Westpac explained. ''A 0.6% rise in overall CPI would take the annual inflation rate to 5.9%, which would be the highest inflation rate since 1990.''

What bank analysts are saying about gold

Meanwhile, gold prices are on the cusp of a breakout, analysts at TD Securities argued. Key quotes:

''In fact, measured against other currencies, gold has broken out of the multi-month downtrend which formed from all-time highs. Considering the extremely poor sentiment in precious metals across the last few months, the bar is low for prices to slice through trendline resistance.''

''Yet, a recent CTA buying program has run out of steam, which leaves the potential breakout in discretionary traders' hands. From this perspective, we highlight that both traders long and short are holding outsized position sizes, but the hawks are more vulnerable to a squeeze.''

''After all, pricing for central bank hikes is in flux, particularly after having been distorted by the terrible liquidity in Treasuries following the recent positioning washout. US real yields are plummeting, in support of gold prices. Further, the market's microstructure still features little market depth, which suggests that a positioning squeeze could have an outsized impact on prices.''

''A breakout north of the multi-month downtrend could also help the trend of ETF outflows reverse, powering gold prices even higher. As for CTA trend followers, a break north of $1860/oz would be required for this cohort of funds to target a positive net length.''