Gold, USD/JPY Forecast: Two trades to watch

Gold falls to a 7-month low on hawkish Fed expectations

Gold is falling for a third straight day, trading below the key 4,000 psychological level and hovering around a seven-month low as traders await U.S. inflation data, which could dictate the Federal Reserve's next policy move.

Gold prices have come under heavy pressure in recent weeks as the Federal Reserve has adopted a more hawkish stance, lifting the U.S. dollar and Treasury yields.

The U.S. dollar remains pinned near a 13-month high after six consecutive sessions of gains, supported by expectations that the Fed may raise interest rates this year. Markets are pricing around a 33% chance of a July rate hike and a 66% probability of a 25-basis-point increase by September.

A stronger dollar makes U.S. dollar-denominated gold more expensive for overseas buyers, while higher interest rates increase the opportunity cost of holding the non-yielding precious metal.

The weakness in gold highlights how markets have shifted their focus away from safe-haven demand and towards the prospect of higher U.S. interest rates.

All eyes are now on today's U.S. Core PCE data, the Fed's preferred measure of inflation, which is expected to rise to 3.4% from 3.3%. A stronger-than-expected reading could reinforce expectations of further Fed tightening, lifting the U.S. dollar and Treasury yields while putting additional pressure on gold. A softer reading could trigger some relief after the recent sell-off.

XAU/USD forecast – technical analysis

XAU/USD has broken below its symmetrical triangle pattern and the 200 SMA, falling to a low of 3,965. The 50 SMA is almost crossing below the 200 SMA to form a bearish death cross.

Sellers will look to extend the decline towards 3,930, the November low, ahead of the 3,800 psychological level.

Any recovery would first need to reclaim 4,100, the March low. Above here, 4,370 comes into focus, the June 17 swing high and the falling trendline resistance, ahead of 4,475 where the 50 and 200 SMAs converge.

USD/JPY rises towards a 40-year high ahead of U.S. Core PCE

USD/JPY is extending gains towards 162, close to a 40-year high, as traders await U.S. Core PCE inflation data, the Fed's preferred inflation gauge, alongside Tokyo CPI figures.

The U.S. dollar remains around a 13-month high against its major peers after last week's hawkish FOMC meeting. Following the first meeting under Federal Reserve Chair Kevin Walsh, markets have significantly increased expectations for further rate hikes, with a September move now seen as increasingly likely.

Today's Core PCE data could provide important clues over the Fed's next move. Expectations are for Core PCE to rise to 3.4% from 3.3%.

A stronger-than-expected inflation reading would reinforce expectations for further Fed tightening and could provide another leg higher for USD/JPY. A softer reading could temper recent hawkish repricing and trigger some profit-taking in the dollar.

Falling oil prices should help ease inflation pressures over time. However, markets continue to focus on sticky underlying inflation and a resilient U.S. labour market, as reflected in elevated two-year Treasury yields despite crude oil trading near four-month lows.

Meanwhile, the yen has continued to weaken despite the Bank of Japan raising interest rates this month.

The BOJ's Summary of Opinions showed policymakers debating mounting inflation risks, with some members calling for faster rate increases. However, with Japanese interest rates at just 1% compared with the Fed's 3.5% to 3.75%, the wide yield differential continues to support the carry trade and limits the yen's upside.

The yen remains on intervention watch as USD/JPY trades close to levels where Japanese authorities previously stepped into the market.

Tokyo CPI data is also due today and is expected to show inflation rising to 1.6% in June from 1.3%. Stronger inflation could strengthen the case for further BOJ tightening, although any support for the yen is likely to remain limited while the Fed maintains a hawkish bias.

USD/JPY forecast – technical analysis

USD/JPY continues to extend gains towards 162, close to a 40-year high. However, the RSI is moving into overbought territory, suggesting the rally is becoming stretched.

Buyers will look for a break above 161.90 and then 162 to extend gains towards 163.

Support is seen around the 160.00 psychological level. A break below here exposes the 50 SMA at 159.30, ahead of 157.90, where the rising trendline and horizontal support converge. Below there, the 200 SMA comes into focus around 156.00.