As Friday’s European session came into view, early gold (XAU/USD) price action attracted buyers. Indeed, the overall price environment underlying the precious escape was notably lacking in bullish conviction. Gold prices remained in this week’s range bound trade. This sentiment reflects a nervousness among traders to move the market without a clear direction. The market has been looking ahead to the release of the September Personal Consumption Expenditures (PCE) Price Index. Consequently, many traders are playing it safe, postponing their plays on the gold market until after this important economic indicator is released.
The anticipation surrounding the upcoming PCE data stems from its potential to influence not only the gold market but broader economic sentiment. Market participants are especially interested in the potential PCE inflation numbers and their influence on the U.S. Federal Reserve’s monetary policy decisions. In fact, there’s better than an 85% chance the Fed will cut interest rates by 25 basis points. Look for this decision to be confirmed at their next policy meeting next week. This expectation is likely to be the biggest driver of gold’s near-term direction.
Current Market Dynamics for Gold
Gold is now stuck within a narrow trading range. It runs into heavy resistance at $4,245 – $4,250. The latest price action certainly does not give off a strong momentum signal. Traders should avoid long positions until the breakout above these levels is clear and beyond doubt. Here’s where gold prices might run into trouble as they continue to advance. This is largely because of the confusing signals coming from technical oscillators on the hourly and daily charts.
If gold is able to convincingly break the support level between $4,164 to $4,163, it would more likely than not test lower levels. Watch for reaction around the $4,100 to $4,090 Fibonacci confluence. Any price drop would likely attract investors looking for a deal. They could view drops to these weekly lows as excellent buying opportunities, particularly given the present surroundings of the market.
While the outcome is hard to decipher, there is still hope for gold to push higher. If gold can maintain its momentum above $4,278, it may pave the way for additional near-term upside potential. It could very well have the opportunity to retake the big $4,300 barrier. The major 200-period Exponential Moving Average (EMA) on the 4-hour chart serves as a steadfast support base. Combined with an upward diagonal trend-line from the end of October, this formation provides traders with an opportunity that is bullish in nature to get positioned for long trades.
Economic Influences on Gold Prices
It is expected to show an increase in US annual inflation, from 2.7% in August to 2.8% in September. An increase in inflation would affect what the market expects the Federal Reserve will do with interest rate increases in the future. Consequently, gold prices can be influenced as well. When inflation clouds the market, investors traditionally turn to gold as a hedge for escalating prices. This is another factor that can drive dramatic shifts in demand dynamics.
Even as the market spins positive reports about the labor market, traders are still gun-shy. This atmosphere of uncertainty is exacerbated by the growing expectation of at least one rate cut from the Federal Reserve. If inflation numbers go even a little bit higher than expected, prepare for massive volatility. This turmoil will be good for gold, and it will be good for other asset classes too. Market participants are looking ahead to these indicators to understand what the outcome may mean for their investment strategies.
In addition, geopolitical factors have contributed to fuelling the market’s bullish sentiment towards gold. Vladimir Putin’s remarks on the Ukraine war have no immediate impact on gold prices. They by no means control the market fundamentals, but they very much do set the tone for market sentiment. Traders closely monitor geopolitical stability and uncertainty, using this information to inform decision-making around investments in safe-haven assets like gold.
Looking Ahead
As traders look to navigate today’s tricky environment, they must consider both technical and fundamental components driving gold prices. The short-term outlook for gold seems to be firmly attached to important resistance and support lines that traders are watching intently. The result of the PCE inflation data release should determine the next direction of gold prices.
Should gold ascend past that key resistance band of $4,245 to $4,250, it may be a signal that investor sentiment is turning positive. This situation will be most likely if robust buying conviction ensues after the PCE data drops. If we cannot break these ceilings, we may continue to consolidate. This might even force increases or decreases down to lower levels of support.