Gold Price Forecast: XAU/USD spikes to two-day tops, beyond $1,740 level post-US CPI

Update: Following the previous day's two-way/directionless price moves, gold gained some positive traction on Wednesday and moved further away from the early week flash crash to the lowest level since March. Concerns about the potential economic fallout from the fast-spreading Delta variant of the coronavirus extended some support to the safe-haven precious metal. The XAU/USD added to its intraday gains through the early North American session and climbed to two-day tops, back closer to the $1,750 level in reaction to mixed US consumer inflation figures. 

In fact, the headline CPI matched expectations and decelerate to 0.5% in July from the 0.9% increase recorded in the previous month. The yearly rate held steady at 5.4% during the reported month as against consensus estimates pointing to a modest downtick to 5.3%. Conversely, core CPI, which excludes food and energy prices, rose 0.3% MoM as against the 0.4% expected and 0.9% previous. The data prompted some US dollar profit-taking, which, in turn, was seen as another factor that acted as a tailwind for the dollar-denominated gold.

Investors, however, seem convinced that the Fed will begin scaling back its pandemic-era stimulus sooner rather than later. This was reinforced by a further move up in the US Treasury bond yields. This, along with a modest uptick in the US equity futures, might hold traders from placing any aggressive bullish bets around the non-yielding metal. Hence, it will be prudent to wait for some strong follow-through buying before confirming that gold has bottomed out in the near term and positioning for any further appreciating move.

Previous update: Gold traded with a mild positive bias through the early European session, albeit lacked any follow-through and was last seen hovering around the $1,733-35 region. The XAU/USD, so far, has struggled to capitalize on Monday's rebound from the flash crash to the lowest level since late March and has been oscillating in a range over the past two trading sessions. Concerns about the economic fallout from the fast-spreading Delta variant of the coronavirus extended some support to the safe-haven precious metal.

That said, expectations for an early tapering of the Fed's massive monetary stimulus acted as a headwind for the non-yielding gold and capped the upside. The incoming US macro data, especially Friday's blockbuster NFP report, marked another step towards the Fed's goal of substantial further progress in the labour market recovery. This, in turn, forced investors to bring forward the likely timing for policy tightening. Moreover, the Fed officials have also started to guide the market towards an early tapering of the massive pandemic-era stimulus and higher interest rates as soon as 2022.

In fact, Atlanta Fed President Raphael Bostic said on Monday that the Fed could begin tapering between October and December, or earlier if there is another month or two of strong job gains. Adding to this, Boston Fed President Eric Rosengren noted that the US central bank should announce in September that it will start reducing the pace of its monthly purchases of Treasury and mortgage bonds this fall. Separately, Chicago Fed President Charles Evans said on Tuesday that the economy is on track to satisfy the Fed's threshold to begin tapering its $120 billion in monthly asset purchases. Evans, however, suggested he was not ready to support announcing a tapering of bond purchases in September.

Nevertheless, the repricing of a sooner than expected move by the Fed pushed the yield on the benchmark 10-year US government bond to the highest level since July 14, closer to the 1.37% threshold. This, in turn, provided a goodish lift to the US dollar, which was seen as another factor that acted as a headwind for dollar-denominated commodities, including gold. The market focus now shifts to the release of the US consumer inflation figures, which will influence expectations about the Fed's next policy action and provide a fresh directional impetus to the XAU/USD.

Technical levels to watch