Gold Price Forecast: Uncertainty Looms Ahead of CPI Data, Fed Policy Decision

Highlights

• Gold prices rise as US dollar weakens, attracting international buyers.
• Market eagerly awaits US inflation data and Federal Reserve’s policy decision.
• Uncertainty surrounds gold’s performance without a clear catalyst for outperformance.

Overview

Gold prices inched up on Tuesday as the U.S. dollar weakened, attracting overseas buyers to greenback-priced bullion. However, the market remained in a narrow range as traders eagerly awaited the release of U.S. inflation data later in the day and the Federal Reserve’s highly-anticipated policy decision scheduled for Wednesday.

The U.S. dollar eased by 0.2%, enhancing the appeal of gold to international investors. As the dollar softened, gold became more attractive as a hedge against inflation. Nonetheless, the non-yielding asset’s appeal could be dampened if higher rates are implemented to combat rising price pressures.

Market Awaits CPI and FOMC

The focus of market participants is currently on the upcoming U.S. Consumer Price Index (CPI) report and the Federal Reserve Monetary Policy Committee (FOMC) meeting. Economists polled by Reuters expect the CPI for May to reflect a slight deceleration in inflation on a year-over-year basis, with a projected increase of 4.1% compared to the previous month’s reading of 4.9%. The monthly increase is anticipated to be 0.2%, down from 0.4% in April.

Traders Seek Gold Price Catalyst

Traders are closely monitoring these events to gain a clearer direction on gold prices. While the CPI and the Fed’s policy decision hold the potential to drive significant market movements, the current outlook for gold remains uncertain due to the lack of a catalyst for it to outperform other asset classes.

Market Anticipates Fed’s Interest Rates

According to the CME FedWatch tool, market expectations indicate an approximately 81% chance of the Federal Reserve maintaining interest rates and a 19% chance of a 25-basis-point rate hike. If the Fed follows the predicted course of action, gold may continue to trend sideways. However, a decisively hawkish tone from the Fed could lead to a substantial decline in the price of gold, while a dovish tone may trigger a surge in short-covering.

ECB to Hike, BOJ to Remain Ultra-Loose

Looking ahead, the European Central Bank is set to deliver its rate decision on Thursday, with a widely expected 25-basis-point rate hike. In contrast, the Bank of Japan, which will announce its verdict on Friday, is anticipated to maintain its ultra-loose policy, adding to the divergent monetary policy landscape across major economies.

CPI Data, Fed Decision Sets the Tone

In conclusion, gold prices are being influenced by the weakening U.S. dollar and the anticipation surrounding the upcoming U.S. inflation data and the Federal Reserve’s policy decision. While the market awaits these crucial events for guidance, the absence of a clear catalyst for gold’s outperformance relative to other asset classes adds an element of uncertainty. Traders will closely monitor the outcome of the CPI report and the Fed’s decision to determine the short-term direction of gold prices.

Technical Analysis

Gold (XAU) is trading on the bearish side of $1992.24 (PIVOT), putting it in a weak position. However, it’s also trading on the strong side of $1917.41 (S1).  The mid-point of this trading range is $1954.83. Early Tuesday, the market is on the strongside of the mid-point, indicating slight upside momentum.

A sustained move over the $1992.24 (PIVOT) will signal the return of strong buyers. If this creates enough near-term momentum then look for a surge into the $2052.37 (R1).

Longer-term, a sustained move under $1992.24 (PIVOT) will indicate the selling pressure is still strong. If this creates enough downside momentum then look for the selling to possibly extend into $1917.41 (S1).