Gold holds ground as markets brace for US CPI data

• Gold finds support as US Treasury yields and Oil prices retreat from recent highs.
• US CPI data takes centre stage as markets weigh the chances of a Fed rate hike.
• Technically, XAU/USD holds above the key $4,300 neckline of a potential Head-and-Shoulders pattern on the daily chart.

Gold holds firm on Friday as a pullback in US Treasury yields and Oil prices offers some support, although buying interest remains limited ahead of the US Consumer Price Index (CPI) report due at 12:30 GMT. At the time of writing, XAU/USD trades around $4,343, recovering from an intraday low near $4,300.

The precious metal fell nearly 2% on Thursday as escalating tensions in the Middle East pushed Oil prices higher, fuelling inflation concerns and adding pressure on the Federal Reserve (Fed) to raise interest rates. Gold typically struggles in a high-interest-rate environment, as rising Treasury yields increase the opportunity cost of holding the non-yielding metal.

The benchmark 10-year US Treasury yield trades around 4.93% after touching 4.97% earlier in the day, its highest level since October 2023. Meanwhile, West Texas Intermediate (WTI) Oil trades near $96 after briefly climbing above $100, down about 4.6% on the day. Despite the sharp pullback, WTI remains on track for a second consecutive weekly gain.

The effect of higher energy costs was visible in Thursday’s Producer Price Index (PPI) report. Annual producer inflation accelerated to 5.4% in August from 4.8% in July, reinforcing expectations of tighter monetary policy.

Upcoming US CPI report could tip the balance ahead of next week’s Fed decision. Headline inflation is expected to rise 0.4% MoM in August, accelerating from 0.1% in July, while the annual rate is forecast to hold steady at 3.4%. Core CPI is projected to rise 0.2% MoM, matching the previous month's reading, while annual core inflation is expected to slow to 2.4% from 2.5%.

According to the CME FedWatch Tool, markets price in a 67% chance of a 25-basis-point (bps) interest-rate hike at the September 15-16 meeting. A hotter-than-expected CPI report could strengthen the case for a Fed rate hike, potentially lifting the US Dollar and Treasury yields while putting Gold under fresh pressure. Conversely, softer inflation figures could ease tightening expectations and help XAU/USD extend its recovery.

According to TD Securities, “the yellow metal has been able to hold support in the higher range, even as the market grapples with renewed energy upside and the near-term increase in Fed hike probabilities.” The bank argues that “strong data and a hawkish Fed may only catalyze relatively modest near-term selling, postponing the timing of the next leg higher, rather than leading to material downside.”

On a more strategic horizon, TD Securities highlights that “the renewed dollar-debasement theme, elevated central bank buying and renewed ETF accumulation offer a strong support base,” reinforcing the view that any short-term weakness is likely to be contained within a broader constructive backdrop for gold.

Technical analysis: XAU/USD defends Head-and-Shoulders neckline near $4,300

XAU/USD maintains a cautiously constructive bias while trading above the 100-day SMA near $4,336 and respecting the $4,300 neckline of a potential Head-and-Shoulders formation on the daily chart. The Relative Strength Index (RSI) sits just below 50, pointing to subdued momentum, while the declining Average Directional Index (ADX) suggests that the prevailing trend is losing strength.

On the downside, a decisive break below the 100-day SMA and the Head-and-Shoulders neckline near $4,300 would confirm the bearish pattern and expose the 50-day SMA at $4,269, followed by $4,200 and $4,000.

On the topside, the 200-day SMA at $4,538 acts as the main resistance. A sustained break above this level would weaken the bearish pattern and open the door to a retest of the August 25 high near $4,697.

(The technical analysis of this story was written with the help of an AI tool. Know more.)