Home Sports Another bullish inflation print dims the XAU/USD trajectory

Another bullish inflation print dims the XAU/USD trajectory

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The fundamental outlook for gold is bearish

  • Gold prices fell 3 percent last week as U.S. inflation rose unexpectedly
  • The Federal Reserve will probably have to step up its fight against prices
  • XAU/USD remains fundamentally biased to the downside as CPI rages on

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Gold prices were headed about 3 percent lower last week as the yellow metal succumbed to the all-too-familiar fundamental backdrop that has weighed on it since the start of the year. The yield on 2-year Treasuries reached 4.5 percent, the first time since August 2007. US dollar also aimed for growth in the last 5 trading sessions.

If Treasury yields and the US dollar move in the same direction, it could have a big impact on anti-fiat gold prices. XAU/USD has no inherent return on holding the asset beyond the expected future price. A bond earns you interest, some stocks offer dividends, and even a currency trade can result in a stream of payments based on the composition of interest rates, also known as a carry trade.

So when interest rates rise, it tends to bode poorly for the yellow metal, and vice versa. Gold’s weakness is compounded by a stronger U.S. dollar, given that the yellow metal is largely priced in U.S. dollars around the world. Therefore, many traders could be caught off guard if they were looking for inflation protection. Despite the world’s highest inflation in decades, gold is down 20% from its all-time high.

Speaking of inflation, last week’s US CPI report carries important implications. In September, both headline and base rates were surprisingly higher. That doesn’t bode well for the Federal Reserve, which will likely have to step up its game to bring inflation down to its target. Since early October, markets have been increasing the likelihood of tightening by 50 basis points in 2023.

With that in mind, based on fundamentals, it’s likely to be a tough week ahead for gold. The US economic list is noticeably flat outside of earnings season. But we will get inflation data from countries like the UK and Canada. Eurozone CPI data is also available. Strong readings will continue to underline global tightening efforts, undermining gold.

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— Posted by Daniel Dubrowski, DailyFX.com strategist

To contact Daniel, use the comment section below or@ddubrovskyFXon Twitter

https://www.dailyfx.com/news/gold-price-outlook-another-raging-inflation-print-dims-xau-usd-s-trajectory-20221015.html

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