Gold Update: XAU/USD Eyes U.S. Economic Data for Guidance

The XAU/USD (Gold) is gaining ground this week, regaining its ground after dropping below a key resistance line. Today’s US economic data could help guide the price towards a new bullish impulse. Traders will be looking to the University of Michigan consumer sentiment, released tomorrow, and the US PPI data, due over the next 24 hours. Both data may trigger surprise hawkish signals, while the Fed’s policy outlook will play a part.

On Thursday, the DXY Index, which tracks the performance of the US Dollar, dropped to its lowest level since the beginning of the week. Inflation remains below the 1% mark, leaving the Fed with a dovish position. It also means that the opportunity cost of holding haven assets, like gold, is lower.

Today’s economic data will be key to the Federal Open Market Committee’s discussion of future monetary policy. With weaker-than-expected inflation data, the Fed may cut its hawkish bets. This may leave gold at risk of a pullback. However, if the economy shows signs of slowing, investors will likely turn to the metal for safety and security.

After an early decline, the gold price has been consolidating its biggest daily gains in a fortnight. It is still below a one-month horizontal resistance line at $1,820, but has recouped some of its losses. The price is trading within the boundaries of a bearish Rising Wedge chart formation. A break below this level may signal a further decline.

Although the Ukraine crisis has not yet been resolved, the threat of further turmoil has given rise to fears of recession in the near future. If the situation deteriorates further, supply chains may be disrupted, which could lead to “risk-off” impulses. These types of movements will benefit gold as a safe haven, but could ultimately weaken the greenback.

The World Gold Council reported that demand for gold rose by 34% in the first quarter of 2022. While this is still well below the five-year average, it is still a significant increase. Increasing demand for the precious metal, along with a higher dollar price, should continue to push gold prices higher in the coming months.

Investors are looking for signs of a possible recession, and are anxious about the US economy ahead of the Fed’s interest rate decision on Wednesday. The market has been anticipating a 50 bps rate hike by the Fed, but softening CPI figures will cut that bet. Also, if the economy continues to contract, it will leave the Fed with a more dovish policy outlook.

The Fed must balance the economy, which includes managing inflation. Slower-than-expected US inflation is the lowest in over a year. As such, the Fed is reluctant to raise lending rates. But this may change if the softer inflation numbers reinforce a dovish stance.

Today’s economic data will be the final piece of the puzzle in the weeks before the Fed’s interest rate decision. If the Fed slashes its hawkish bets, the market will likely react negatively to that, with gold prices rising.