Gold outlook: Home on the range with significant risk events ahead

• Gold continues to range trade as higher global bond yields are offset by elevated geopolitical risk premium
• Inflation reports from the US and UK loom as major risk events for gold traders
• Gold continues to attract buyers on tests of uptrend support, suggesting the near-term bias remains higher

Gold held up well last week despite rising US yields, assisted in part by continued geopolitical tension in the Middle East. But in week with key inflation reports in the United States and United Kingdom, there are plenty of catalysts looming on the horizon that could shake gold from its slumber.

Long bond yields continue to influence gold price

Maintaining the pattern seen in January, gold continues to demonstrate a strong inverse relationship to movements in US benchmark 10-year yields with the correlation over the past month sitting at -0.74, far stronger than that of US 2-year yields and US dollar index over the same period. With that in mind, the focus of traders should be on those events that may influence shifts in the longer end of the bond curve.

US, UK inflation reports could shake things up

Few days are bigger Tuesday with the release of inflation reports from the US and UK.

With the Bureau of Labor Statistics’ (BLS) annual consumer price revision from Friday now out of the way, attention now reverts to what the implications are for the Federal Reserve in bringing inflation back to its 2% target on a sustainable basis.

According to the Cleveland Fed’s inflation nowcasting model – which has been a decent guide as to how core inflation will print on any given month – suggests we’ll see a monthly increase of 0.32% for January, leaving the annual rate at a still uncomfortably high 3.81%.

But as CPI is not the Fed’s preferred underlying inflation measure, there may be arguably more market interest on Friday’s producer price inflation report given some inputs can be mapped into the core personal consumption expenditure (PCE) deflator released in late February. Right now, the Cleveland Fed models are pointing towards a smaller 0.24% monthly increase for the Fed’s preferred inflation measure.

Source: Cleveland Fed

Elsewhere on the calendar, NY Fed inflation expectations, US retail sales, initial jobless claims and University of Michigan consumer inflation expectations release carry the potential to move Treasury yields, along with another gaggle of Fed speakers. Those speaking after the CPI report should be of more interest to traders.

UK CPI – after a big upside surprise in December – will also garner attention, especially with other developed economies seeing evidence of a pickup in price pressures. After moving into negative territory late last year, signalling a small net proportion of inflation readings had undershot market expectations, Citigroup’s inflation surprise index for G10 FX nations looks like it may have already bottomed.

Source: Refinitiv

The performance of the KBW Bank index – which appears to be used by markets as a proxy for broader concerns around the US commercial real estate sector – is another market indicator that has shown on occasion to have a strong positive correlation with US yields, especially at the shorter end of the US bond curve.

Geopolitical situation in the Middle East remains fluid

On the geopolitical front, Israeli Prime Minister Benjamin Netanyahu outright rejection of ceasefire proposal from Hamas late last week suggests the risk premium in the gold price will remain, although it clearly remains a fluid situation.

Based on remarks from US President Joe Biden on Friday, the United States continues to push hard for a sustained pause in hostilities in Gaza despite the latest setback.

Gold: trading sideways but biased higher

Not a lot has changed with gold’s technical setup since last week, although it is noteworthy dips below uptrend support annotated on the chart continue to be bought, cementing the price within the $2006-2080 trading range it’s been operating in since late December. The bullish hammer candle printed on Thursday suggests the bias remains higher near-term unless we see a clean break and close below the trendline.

Above, a clean break of the resistance zone between $2070-80 would see markets set sights on the record high above $2140 set in early December. On the downside, while the price remains comfortably above $2000 per ounce, a break of $2006 may bring a push towards $1980 into play.

-- Written by David Scutt

Follow David on Twitter @scutty