Gold prices have continued their downward trajectory this week, facing a decline of over 1% following a previous 3% loss. This slide is attributed to surging global bond yields, which are exerting significant pressure on XAU/USD. The market is closely monitoring the impact of robust U.S. macroeconomic data on the Federal Reserve’s policy stance, and all eyes are now on next week’s Consumer Price Index (CPI) data from the U.S. to gauge the likelihood of another Fed rate increase in 2023.
Review of the Previous Week
As the U.S. Congress narrowly avoided a government shutdown by extending the current budget, market sentiment remained cautious at the start of the week. The ensuing uncertainty in U.S. politics triggered a further sell-off in U.S. Treasury bonds, causing 10-year bond yields to rise by more than 2%. This uptick negatively impacted XAU/USD, pushing it into negative territory.
China’s economic data over the weekend indicated a loss of growth momentum in the private sector, with both Caixin Manufacturing PMI and Services PMI declining. Additionally, the U.S. Bureau of Labor Statistics reported a surge in job openings in August, reinforcing expectations of a tight labor market and bolstering hawkish bets on the Federal Reserve’s policies.
Mid-week saw uninspiring macroeconomic data from the U.S., including a weaker-than-expected employment increase in the private sector and a slight decline in the ISM Services PMI. Despite these developments, XAU/USD continued to trade within a tight channel around $1,820.
The release of the U.S. jobs report on Friday revealed that nonfarm payrolls (NFP) had increased by 336,000 in September, with upward revisions to the July and August NFP figures. This news bolstered the U.S. dollar and limited the upside potential for XAU/USD.
What to Expect Next Week
The upcoming week may see subdued market activity, with American investors enjoying a three-day weekend. On Wednesday, the Federal Reserve will release the minutes of its September policy meeting. While the Summary of Economic Projections in September indicated a potential rate increase by year-end, any hawkish remarks in the minutes may be disregarded by investors, given the sharp upsurge in U.S. Treasury bond yields since then.
Market participants will closely monitor September’s inflation report from the U.S. on Thursday, particularly the Consumer Price Index (CPI) and Core CPI. A larger-than-expected rise in monthly CPI, driven by higher oil prices in September, may not come as a surprise. However, the impact of rising energy prices on CPI inflation is expected to be short-lived, given the recent drop in oil prices. Conversely, a soft inflation reading could lead to dovish Fed bets and provide support for Gold.
Friday will feature China’s Trade Balance and CPI data for September, which could impact Gold’s performance in the Asian trading hours. An expansion in China’s trade surplus and a significant increase in monthly CPI could boost Gold’s strength.
Additionally, investors will closely scrutinize comments from Fed policymakers next week. Acknowledgment that rising yields could allow the Fed to maintain the policy rate for the rest of the year could bolster XAU/USD. Conversely, if policymakers downplay the yield increase and emphasize the need for further tightening, the benchmark 10-year U.S. T-bond yield may continue its ascent toward 5%.
Gold’s Technical Outlook
The Relative Strength Index (RSI) on the daily chart has dipped below 20 this week, signaling extremely oversold conditions for XAU/USD. Historically, such RSI levels have preceded rebounds in Gold prices. Sellers may temporarily retreat, allowing for a potential upside correction before determining the direction of Gold’s next move.
The $1,840 level (Fibonacci 50% retracement of the long-term uptrend) serves as the initial resistance, with a daily close above this threshold potentially paving the way for a broader recovery towards the $1,890-$1,900 range. On the downside, interim support lies at $1,815, followed by $1,800, with further declines potentially taking XAU/USD to $1,780.
As Gold navigates oversold conditions and market sentiment fluctuates, investors are poised for potential market shifts in the week ahead.