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A surge in the US inflation in January does not change anything in the Fed’s monetary policy. There are still two reports before the FOMC May meeting, and a lot can change. However, gold buyers are full of optimism. Let’s talk about this topic and draw up a trading plan.
The article covers the following subjects:
Key fundamentals & events impaction to Gold price
Gold followed Treasury yields rather than the US dollar. The price tested the level of $2,050 per ounce amid the US inflation report for January. Besides, US bond yields initially soared on expectations of hotter PCE data, but when the actual numbers came out, Treasury yields collapsed. This created a tailwind for XAUUSD.
Response of Treasury yields to US PCE report
Source: Wall Street Journal.
The Personal Consumption Expenditures Index, the Fed’s preferred indicator of inflation, slowed to 2.4% in January and core PCE to 2.8% on an annual basis. On a monthly basis, the indicators, on the contrary, accelerated to 0.3% and 0.4%, which raised their estimated values on a 3- and 6-month basis above the target of 2%. Investors believed that inflation had increased, but there were risks that it would rise above the forecasts of Bloomberg experts. If this happened, market expectations for the start of the Fed’s monetary expansion would shift to a later period. It would press the gold price down. The actual data has been different, and the XAUUSD bulls are going ahead.
Dynamics of US inflation
Source: Wall Street Journal.
In fact, the acceleration of PCE in January does not change anything in the Fed’s worldview. The regulator has finished raising rates and intends to lower them at some point this year. Derivatives have ruled out March as the likely start month for monetary policy easing and are giving a 24% chance for May and a 58% chance for June. However, before the last spring FOMC meeting, two more reports on US employment and inflation will be released, so everything may change. The Fed could start cutting rates in May, which would create an ideal environment for gold.
The gold market depends on the value of money. At the same time, the central bank’s rate hike increases Treasury yields and presses down the XAUUSD. However, the precious metal price grew by 13% at the end of 2023, when the Federal Reserve carried out a cycle of monetary restriction. The gold market was supported by the demand from central banks and China. Thus, in December, PBoC increased its gold reserves for the 14th month in a row from 71.58 million to 71.87 million ounces. Chinese January imports of metal from Hong Kong increased by 51% to 76.2 tons.
Therefore, Asian reserves still support the XAUUSD. Gold is resisting both the strong US dollar and the resilient US economy. These headwinds are fueling ETF outflows of 44 tons in February and 95 tons through early 2024 and keeping the gold price in the trading range of $2,000-$2,050.
Weekly trading plan for gold
The gold price will break out the upper border of the above-indicated trading range if the US economy shows signs of cooling down. The first signal could be sent by the US jobs report. If the jobs market began to lose steam in February, the market would return to the idea of a Fed’s rate cut in May, which will suggest adding up to the longs entered below $2,000. I recommend holding up these positions for now.
Last week, our trading plan suggested entering a medium-term buy trade as the gold price was approaching $2,000. Currently, the price has exceeded the indicated level, and we should move to this strategy for taking the profit in the future.
XAUUSD Elliott wave analysis and trading scenarios
According to the technical analysis of gold price charts, XAUUSD remains likely to grow. The estimated pivot point is at a level of 1983.58.
Main scenario
Consider long positions from corrections above the level of 1983.58 with a target of 2220.00 – 2300.00.
Alternative scenario
Breakout and consolidation below the level of 1983.58 will allow the pair to continue declining to the levels of 1916.55 – 1809.00.
Wave analysis
The fifth wave (5) is unfolding, with the first wave 3 of (5) forming as its part. Apparently, the first wave of smaller degree i of 3 is forming on the H4 time frame, with a local corrective wave (iv) of i completed as its part. Wave (v) of i is presumably developing on the H1 chart, with wave iii of (v) forming as its part. If the presumption is correct, the XAUUSD pair will continue to rise to the levels of 2220.00 – 2300.00.
The level of 1983.58 is critical in this scenario as a breakout will enable the pair to continue falling to the levels of 1916.55 – 1809.00.
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Price chart of XAUUSD in real time mode
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