Gold outlook: CPI in focus as investors keep eye on yields

Gold was up for the second day ahead of US inflation data, threatening to break higher. However, bond yields are unlikely to fall back significantly in the near-term, even if we see a small miss in US inflation data today. This should keep the upside limited for gold. Therefore, we are still quite cautious when it comes to near-term gold outlook, even if we ultimately expect to see gold rising to $3,000 later this year.

Gold outlook: all about bond markets

It is the bond markets where investors’ attention remains firmly fixated on, not just those involved in gold but for equity and FX traders too. Bond yields have been surging higher in recent days across the world, all due to rising expectations that interest rate are likely to remain tight for longer, mainly in the US, but European rate expectations have also been repriced higher somewhat - most notably in the UK. In Japan, investors are growing confident that the Bank of Japan is going to start lifting rates further from their ultra-low levels and bring monetary policy a little closer to the rest of the world.

In the last couple of days, though, we have seen a bit of a pullback in those expectations thanks to release of weaker-than-expected US PPI on Tuesday and UK CPI earlier today. This has allowed gold to rise a little in the last couple of days.

The focus is now turning to the US CPI report. A weaker set of inflation data could cause the metal to further strength while hotter data should be bad news for all low-yielding currencies and zero-yielding assets alike.

Today’s CPI report will come hot on the heels of the much stronger December jobs report than was expected on Friday, and the recent upsurge in oil prices – all helping to fuel expectations that inflation is going to remain sticky.

Beyond data and oil prices, it is Trump’s threat of tariffs that is the main driver behind rising inflationary expectations. So far, his rhetoric has not softened, through reports suggest he may apply tariffs more gradually to help limit inflation.

Therefore, if we are to see bond yields and the US dollar reverse more meaningfully, expectations about Federal Reserve rate cuts will have to be brought significantly forward from currently pricing of October for the first cut.

In the coming months, this will mostly depend on how the new US government will proceed with its policy of tariffs and how that might impact inflation, plus the impact of oil prices. In the short term, only the trend of incoming data will be able to impact those expectations. The impact of individual data releases will therefore be limited - as we will likely find out with the CPI release later on.

Anyway, CPI inflation is seen rising to 2.9% y/y from 2.7% the previous month, while core CPI is expected to remain unchanged at 3.3%. On a month-on-month basis, they are seen printing 0.4% and 0.3%, respectively.

Technical gold outlook: key levels to watch

Source: TradingView.com

Gold was again trying to break above the resistance trend of its recent consolidation pattern to the upside, ahead of the inflation data. Earlier this week, it found support at $2660, and managed to hold above the 6-month-old bullish trend line once again. The trend line comes in around the $2640-50 area. We will turn tactically bearish on the gold price outlook should this trend line break down. Unless that happens, our gold outlook is neutral at current levels. The next level of resistance comes in around $2695, followed by $2710.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R