Gold Price Leaps as the US Dollar Crumbles After US CPI. Where to for XAU/USD?

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GOLD, XAU/USD, US DOLLAR, (DXY), CPI, FED, REAL YIELDS - TALKING POINTS

• Gold rocketed higher after CPI numbers weakened the US Dollar
• With the Fed now focused on hosing down inflation, real yields may lift
• Volatility remains subdued as gold is kept range bound. Will XAU/USD shine?

Gold moved higher after headline US CPI printed at an ‘eye watering’ 7% year-on-year to the end of December. The highest level since June 1982, when Rocky III was breaking box office records.

If there was ever any doubt, the Fed now has a fight on its hands. The terms ‘base effect’ and ‘transitory’ will be studied by economic students for generations.

In the present, the reality of uncomfortably high inflation is front and center. Aside from price instability, the issue with high inflation is that it erodes the value of money over time.

This is good news if you are a borrower, but bad news if you are a lender.

The risk for the Fed, is that the measures required to get rid of inflation could snuff out economic growth. Some fancy footwork might be required.

Treasury yields inched lower in the belly of the curve but crept a touch higher in the short and long ends in the aftermath of the data.

All the action was in the currency ring, with the US Dollar weakening across the board. Prior to the data, there was some chatter about a higher-than-expected CPI number and the perception in the market, rightly or wrongly, is that all of the Fed’s rate hikes are fully priced in.

The US Dollar index (DXY), EUR/USD, GBP/USD and AUD/USD, among other currency pairs, saw the Dollar make multi month lows. However, gold was unable to breach the high seen last week.

This might be explained by the rise in real yields. Market priced inflation expectations moved lower, and this bumped up real yields, even in the 10-year part of the curve where nominal yields fell.

The chart below highlights these offsetting factors in play. Looking ahead, it would seem that the fate of gold is largely in the hands of changes in inflation expectations, rather than the current level of inflation.

 

 

GOLD TECHNICAL ANALYSIS

Gold has rallied to the top end of the 1753.10 – 1831.65 range that it has been in since mid-November.

Resistance could be at the previous highs of 1829.68, 1831.65 and 1877.15 as well as the pivot point of 1834.14.

There is a clustering of short, medium and long term simple moving averages (SMA) just below the price. The price has moved above and below these SMAs several times.

Technically speaking, orders related to these SMAs would have been executed and may not be there anymore. It’s possible they have been re-instated, but there may not be as much liquidity around theses SMAs as there was previously.

On the downside, support could be at the pivot points and previous lows of 1778.50, 1761.99, 1758.93, 1753.10 and 1721.71.

Chart created in TradingView

 

Written by Daniel McCarthy, Strategist for DailyFX.com. 13th Jan 2022