Gold: Strategies to Consider Ahead of US CPI and FOMCGold continues to hover around the 1,800-mark level, currently testing a multiple resistance zone, which includes the major 200DMA at 1,790, the 38.2% Fibonacci retracement level of the 2022 lows to highs and the December high at 1,810.
The recent gold rally has been supported by a weaker USD, therefore the US CPI and FOMC meeting next week will provide important new information for gold. These significant events have the potential to steer patterns in both the US dollar and US interest rates moving into the beginning of the new year.
A higher-than-expected inflation rate or reading over the 7.7% estimate for October might be the major negative risk for gold.
Although an increase in inflation is unlikely to influence the Fed's decision to raise rates by 50 basis points the next day, which appears to be a done deal according to the swap market, it could lead to a rate repricing in 2023, with the market already pricing in about 50 basis point cuts in the second half of the year.
So all eyes will be on how the dollar reacts to the CPI report, as well as the Fed's new macroeconomic forecasts and Powell's remarks.
The market may be pricing in an extremely dovish Federal Reserve in 2023; if expectations are not reached, this may generate negative responses in assets that are more sensitive to fluctuations in US interest rates, such as gold.
Gold's last month rally has been aided by a weaker dollar
Gold is trading "rich" vs US real yields
The price of the precious metal is now also trading at a level that is richer than what would be predicted by US 10-year real yields. US 10-year nominal yields have dropped below 3.5%, sending real yields down to 1.2%.
However, if US rate expectations shift due to a hawkish Fed or higher-than-expected CPI, gold may see profit taking and bearish pressure from here.
How could gold react next week?
There is a non-negligible risk of seeing a higher-than-expected CPI and the Fed reassessing the importance of tackling inflation, signalling that there is still room to hike, especially given last week's extraordinarily strong NFP print (270K vs. 200K forecast) and this week's strong services PMI and PPI data.
Consequently, the headwinds that have characterised gold's movement this year might return next week. Therefore, if there is a repricing of real rates as a result of a hawkish Federal Reserve, gold prices may decline and fall below $1,750/oz (-1std of the 20DMA Bollinger band).
If downside risks do not materialise, a lower-than-expected November US CPI reading and a Federal Reserve warning of rising recession risks in 2023 would be viewed as the ideal cocktail for gold prices to push decisively above $1,810 levels and attempt to attack $1,841/oz, where they would have completed a 50% retracement from 2022 lows to highs. This would be a significant change in the gold trend, indicating that the worst is likely behind us.
