Gold Prices Forecast: XAU/USD Rallies as U.S. Inflation Slows, Fed Rate Hike Fears Eases

Highlights

• Gold prices rise on weaker U.S. dollar and bond yields.
• U.S. inflation slows, hinting end to Fed’s rate hikes.
• Dollar index drops, making gold cheaper for foreign buyers.
• U.S. Treasury yields fall after soft inflation data.

Gold Prices Rally Amid Softening U.S. Inflation

Gold (XAUUSD) prices are edging higher on Wednesday, bolstered by a weakening U.S. dollar and declining bond yields, as new data suggests a slowdown in U.S. inflation, potentially signaling an end to the Federal Reserve’s rate-hike campaign. The U.S. consumer price index (CPI) showed no change in October, with the annual rise in core inflation being the smallest in two years, hinting at a softening inflation scenario.

Market Response to Inflation Data

This softer-than-expected inflation print has led to a more than two-month low in the dollar index, subsequently making gold more affordable for holders of other currencies. U.S. Treasury yields have also seen a significant drop, with the 10-year Treasury yield falling to about 4.45% and the 2-year yield to 4.8%. These shifts in the financial landscape are crucial, as they suggest a change in the Federal Reserve’s strategy towards inflation control, aiming to reach its 2% target without triggering a recession.

Federal Reserve’s Interest Rate Strategy

Recent data has led to speculation about the Federal Reserve’s next steps regarding interest rates. The options market, post-report, indicated a 0% chance of a rate hike in December, and a minimal chance in January, according to the CME FedWatch Tool. Fed Chairman Jerome Powell’s recent reaffirmation of the Fed’s 2% inflation target keeps market participants on their toes regarding future rate decisions.

Currency Markets and Gold’s Prospects

The U.S. dollar’s slump, triggered by the inflation report, has energized other major currencies, with the euro nearly reaching a two-month high. The possibility of a rate cut by May next year is now being factored into market expectations, affecting both the dollar’s value and U.S. Treasury yields. These conditions enhance the appeal of gold as a safe-haven asset.

Outlook and Upcoming Economic Data

Investors await further economic indicators such as the U.S. retail sales data and producer price index (PPI) to gauge the Federal Reserve’s interest rate trajectory. Despite ideal conditions for a gold rally, the metal’s increase has been modest, reflecting an ongoing process of market adjustment to various geopolitical risks. This cautious increase indicates that the market is still weighing other global factors alongside inflation data.

Technical Analysis

Gold (XAU/USD) currently trades above both its 200-day and 50-day moving averages, positioned at 1936.07 and 1925.23 respectively. This positioning above the longer-term averages typically indicates a bullish trend.

However, it’s important to note that the current price is closer to the minor support level at 1952.21 than the minor resistance at 1987.00. This proximity to support suggests a degree of vulnerability and potential for a pullback, especially if the support level is breached.

Overall, the market sentiment is bullish, but with caution due to the nearness to the support level, suggesting the possibility of fluctuation within this range before a clear directional trend is established. But, as long as the moving averages continue to provide support, our bias is to the upside with the possibility of an acceleration if the 50-day moving average overtakes the 200-day moving average.