Gold Price Forecast: XAU/USD has moved on a critical resistance, bulls could capitulate

Update: Gold (XAU/USD) was firmly bid on Wednesday and reached up to the neckline of the daily M-formation, a target that was highlighted in, Gold, Chart of the Week: Bulls take on the 38.2% Fibo, now eye the 61.8% golden ratio:

Gold, prior analysis, daily chart

Gold, live market, daily chart

As illustrated, the target has been met and a new bearish structure has formed in the W-formation. However, there are no bearish confirmations in the price action as of yet and bulls have not thrown in the towel, so far. 

Technicals aside, the US Consumer Price Index will be scrutinised for details that could seal the deal for the Federal Reserve's lift-off in March by one degree or another, (25bps or 50bps). Considering the pre-data long squeeze in the US dollar that has shed some 2.3% since the Jan highs as measured by the DXY, there is plenty of room for a sizeable correction to the upside into the 96.00 area. Gold could come under pressure on that basis alone.

''The bar is high for a substantial squeeze,'' in gold, ''as we estimate that prices need to breach $1870/oz to catalyze a buying program from CTA trend followers,'' analysts at TD Securities argued who have placed a bearish strategy on gold in the options market. 

''Our ChartVision framework further supports our view, suggesting that a break below $1750/oz by July 2022 would be consistent with a sustained downtrend in the yellow metal. In turn, we add a GCQ2 July22 $1750/$1600 gold bear put spread to our model portfolio.''

As illustrated in the start of the week's pre-open analysis, ''until the M-formation's neckline is broken, the focus is on the downside.''

End of update

Gold (XAU/USD) rallies in the New York session taking advantage of a catalyst, alongside falling US Treasury yields, ahead of the US inflation report. At press time, XAU/USD is trading at $1834.61, advancing close to 0.50%.

Financial markets sentiment is upbeat, as reflected by equity markets. The global bond sell-off stopped as the US Department of Labour would reveal January’s inflation report on Thursday, widely expected by market players. That said, on Wednesday, US Treasuries yields are dropping led by the 10-year benchmark note down three basis points, sitting at 1.923%

Fed’s Mester expects a hike in March meeting

In the meantime, a light US economic docket left XAU/USD traders waiting for Fed speaking and market sentiment. Earlier, Cleveland’s Fed President Loretta Mester (voter 2022) said that she “expects inflation will moderate but would remain above 2% this year and next.” Worth noting that Mester supports a rate increase in March, followed by future rate hikes, which the economy will guide.

That said, market players prepare ahead of the US Consumer Price Index for January, to be released on Thursday. Estimations for the headline CPI lie at 7.3%, while Core CPI is foreseen at 5.9%.

Worth mentioning that analysts at TD securities expect inflation to “slow significantly in 2022, and fiscal stimulus fades and supply constraints ease, but for now, the data remain strong.” TD analysts’ estimates for January’s inflation are headline CPI at 7.2%, while core CPI at 5.8%. In the meantime, for the remainder of the year, TD analysts expect headline CPI to recede to 2.9% y/y in Q4 of 2022 while excluding volatile items, also called core CPI, at 3.0% y/y in Q4 of 2022.

XAU/USD Price Forecast: Technical outlook

On Wednesday, XAU/USD broke the central line of Pitchfork’s channel at $1,830, exposing July 2021 swing high at $1,834. Nevertheless, that price level has been unsuccessfully tested four times, though, by the end of November 2021, it was broken when XAU/USD reached $1,877 before retracing its gains towards $1753.

XAU/USD first resistance would be $1,834. A daily close above would expose the January 25 high at $1,853, followed by a nine-month-old downslope trendline around  $1,860.

On the flip side, XAU/USD’s first support would be Pitchfork’s central line, around $1,820. Breach of the latter would expose the confluence of the 50 and 200-DMA around $1,806, followed by the 100-DMA at $1,798.