Gold forecast: XAU/USD struggles as oil keeps yields underpinned

• Rising oil prices and hawkish central banks continue to weigh on gold forecast
• Safe-haven demand, central bank buying, helping limit deeper downside moves
• Traders will keep an eye on upcoming US inflation data

 

Gold prices slipped again, giving back more than 1% by late morning London session. The market continues to struggle for direction after last week’s brief recovery. Although bullion managed to avoid a third consecutive weekly decline, the overall tone still feels mixed-to-heavy. The metal seems trapped between two competing themes. On one side, there is ongoing geopolitical uncertainty in the Middle East, which continues to generate a degree of safe-haven demand. Ironically for the same reason, rising oil prices and increasingly hawkish central bank rhetoric are keeping bond yields elevated and supporting the US dollar — a combination that has made life difficult for precious metals recently.

 

Oil remains biggest driver for markets

 

The volatility in oil remains one of the biggest drivers for gold and indeed the wider financial markets. As long as the blockade of the Strait of Hormuz persists, traders are reluctant to price in any meaningful drop in crude prices. Sustained strength in energy markets keeps inflation concerns alive, meaning the Federal Reserve may be forced to hike policy again, not ease.

 

Indeed, the market is beginning to appreciate that the inflation story may not be going away as quickly as many expected earlier this year. If oil prices remain elevated, it becomes much harder for central banks to comfortably shift towards rate cuts. That is one reason why the dollar has stayed relatively firm despite growing concerns about global growth.

 

Oil prices pushed higher again today after comments from Donald Trump rejecting Iran’s latest proposal aimed at reducing tensions. The market interpreted the remarks as another sign that the situation is unlikely to resolve anytime soon, despite recent optimism.

 

While crude markets have been cushioned somewhat by healthy inventories, reserve releases, and softer demand from parts of the global economy, the broader risk profile still points higher. Much of that comes back to uncertainty surrounding supply routes and disruption in the Gulf region.

 

Hawkish central banks keeping yields elevated

 

At the same time, the tone from several major central banks has become noticeably more cautious again. Markets had spent much of the year focused on the timing of future rate cuts, but now there is increasing discussion about whether policymakers may need to keep rates elevated for longer if inflation remains sticky.

 

That puts this week’s US inflation data firmly in the spotlight.

 

A stronger-than-expected CPI reading would likely reinforce the idea that the Fed may have to at least start thinking about tightening its belt again. If that happens alongside firm oil prices, Treasury yields could continue drifting higher, which would probably keep gold prices on the defensive in the near term.

 

Gold technical analysis and levels to watch

 

From a technical perspective, gold still looks stuck in consolidation, although the short-term bias remains slightly negative.

 

 

The recent lower highs suggest this is no longer a strong bullish trend for XAUUSD. Even so, the broader uptrend has not completely broken down. The 200-day moving average, for example, is still trending upward, which suggests the longer-term structure remains constructive despite recent weakness.

 

The $4,700 region has become an important short-term area to watch. If the buyers can regain control above that zone, attention would then shift towards resistance around $4,850.

 

On the downside, $4,647 is initial support. Loose than, $4,586 will be in focus next, followed by $4,500 and then $4,400.

 

For now, gold still feels like a market better suited to short-term range trading rather than aggressive trend-following. The conflicting macro drivers should keep both the downside and upside limited until something gives way.

 

 

 

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R