Gold Price Forecast: XAU/USD is chipping away at critical support, eyes on a strong breakout

• Gold bears are chipping away at the downside and eye a break of last week’s lows. 
• The US dollar remains in the hands of the bulls at the start of the week. 
• US CPI will be a critical event for the gold price. 

The price of gold has been under pressure at the start of the week due to a robust US dollar in the open, edging to fresh highs vs. its counterparts, with a strong US labour market reinforcing bets on higher interest rates as traders braced for data expected to show stubbornly high inflation. At the time of writing, the gold price has scored a low of $1,691.89 on the day so far, losing a high of $1,699.91.

Nonfarm payrolls climbed 263,000, above the consensus estimate for an addition of 250,000 jobs. The service sector added 244,000 jobs, driven by gains in education and health services and leisure and hospitality.  The Unemployment Rate fell to 3.5% in September from 3.7% in August, compared with calls for the rate to remain unchanged. The labour force participation rate slipped 0.1 percentage point to 62.3%.

 This goes against their battle to restore demand-supply-side balance in the labour market in the face of inflation, meaning that strong rate hikes are a given for the foreseeable future and this is a headwind for gold prices vs. a flattening curve. This will make for another critical week for the days ahead with plenty of US calendar events, including the minutes f the prior Fed meeting, US inflation data and Retail Sales.

Gold weighed by risk-off

Futures pricing suggests traders see a nearly 90% chance of a 75 basis point rate hike in the United States next month and more than 150 bps of tightening by May. As a result, US stocks dropped on Friday. The Dow Jones Industrial Average collapsed by more than 600 points, sliding 2.11%, while the S&P 500 lost 2.8% and the Nasdaq Composite IXIC lopped off 3.8% in value as investors bet that the Fed’s inflation fight will continue apace. The MSCI world equity index,  which tracks shares in 45 nations, was down 2.45%. 

In some respects, this is a positive for gold in that investors will seek out the yellow metal for its safe haven status, although despite ongoing geopolitical tension, given that inflation’s rising persistence suggests the Fed is unlikely to stop hiking preemptively, the bears continue to run on that instead. 

 ”A prolonged period of restrictive rates suggests traders should ignore gold’s siren calls, as a sustained downtrend will likely prevail, while quantitative tightening continues to drive real rates higher,” analysts at TD Securities argued. ”Indeed, a constant flow of hawkish Fedspeak has seen the upside momentum in gold ease in recent days. And, with an important jobs report this morning and inflation data next week, there are plenty of catalysts which could see the focus shift back toward hawkish interest rate policy.”

China risk supports USD

Meanwhile, Chinese markets reopen after a week-long holiday. The Communist Party’s 20th National Congress opens on Sunday and is expected to reaffirm Xi Jinping’s leadership. A stubbornly weak yuan environment is an additional bullish factor for the US dollar while China’s economy struggles under the weight of ongoing COVID outbreaks and lockdowns.

We saw more evidence of that in the weekend’s Caixin Services Purchasing Managers’ Index (PMI) for September 2022 which came in lower at 49.3 from 55.0 in August, taking it back into contraction. We have also seen China official services PMI miss the mark at 50.6 (expected 52.0, prior 52.6) and China Caixin / Markit Manufacturing PMI for September was disappointing at 48.1 (expected 49.5, prior 49.5). This all should fall into the hands of the greenback, especially with the number of geopolitical risks thrown into the mix. 

North Korea is rearing its ugly head again with news on the weekend that it had been conducting nuclear operation training, as per Reuters reporting that has cited North Korea’s KCNA news agency reporting this on Monday. The nation fired two ballistic missiles early on Sunday, authorities in neighbouring countries said, the seventh such launch by Pyongyang in recent days that added to widespread alarm in Washington and its allies in Tokyo and Seoul.

On the flip side, ”USD upside will be harder to achieve at this point in large part because the MOF/BOJ seem intent on squashing USDJPY vol,” analysts at TD Securities argued. ”So far, that has been successful. Currently, they sit on about $1tn of reserves, so they have some ammo to engage in this operation. We think a move above 145 risks yen intervention again and that could introduce some USD drag into the complex, albeit temporarily. 140/145 is fair for USDJPY at this time.”

For the week ahead, the US inflation data will be a key event. The US Consumer Price Index likely stayed strong in September, with the series registering another large 0.5% MoM gain, analysts at TD Securities argued. ”Shelter inflation likely remained strong, though we look for used vehicle prices to retreat sharply. Importantly, gas prices likely brought additional relief for the headline series again, declining by about 5% MoM. Our MoM forecasts imply 8.2%/6.6% YoY for total/core prices.”

Gold technical analysis

The gold price is on the verge of a significant breakout below $1,690 and the bulls will need to show up in the day ahead or face strong opposition and breakout traders moving in with eyes on $1,675.

However, as per the 15-min chart, the bulls could push the price up through the trendline resistance for the last attempt at the bear’s commitments at $1,700. While the peak formations are up, there will be liquidity above the highs as well, making for a potential trapped market ahead of US CPI.