Gold Update: XAU/USD Pulls Back Ahead of CPI Release

After reaching a new all-time high around $2,950 per troy ounce, gold is now experiencing a significant downward correction, dropping more than 1.5% in the last few trading hours. This adjustment is largely due to market sentiment, as investors may see gold as having appreciated significantly, leading to position liquidations at current levels. Additionally, uncertainty ahead of the upcoming CPI release in the United States has contributed to investor caution.

The Role of Inflation

Gold has recorded a notable increase in value, gaining over 6% since January, driven in large part by uncertainty surrounding U.S. tariff policies. However, Friday’s employment data and the upcoming CPI release (tomorrow) could trigger strong movements in the U.S. dollar, which in turn would impact XAU/USD price action.

For now, the market expects the Consumer Price Index (CPI) monthly figure to come in at 0.3%, slightly lower than the previous 0.4% reading. Meanwhile, the annual CPI is projected to remain at 2.9%, unchanged from the last report.

Inflation remains a key factor in anticipating the Federal Reserve’s next moves. According to CME Group, there is currently a 93.5% probability that the central bank will maintain interest rates at 4.5% in its next March 19 meeting. However, what has surprised the market is the shift in expectations for the May meeting, where the probability of rates remaining at current levels has risen to 76.9%.

Source: CME Group

If tomorrow’s inflation data surpasses the 2.9% forecast, the Federal Reserve could reinforce its stance on keeping rates at 4.5% for the foreseeable future. Higher interest rates make the U.S. dollar more attractive compared to other currencies, such as the euro, and position it as a competitor among safe-haven assets, a role that gold possesses.

In this scenario, a stronger dollar, backed by high interest rates, could exert downward pressure on gold. Firstly, because XAU/USD is priced in dollars, meaning a stronger greenback makes gold more expensive for foreign buyers, reducing demand. Secondly, in a high-rate environment, investors may prefer yield-generating assets denominated in U.S. dollars, such as Treasury bonds, over gold, which does not provide interest or dividends.

A Correction Begins

After several sessions where CNN’s Fear & Greed Index was in “fear” territory, the index has now risen to 47, reflecting a more neutral market sentiment.

Source: CNN

The current index values suggest that the market has largely absorbed the uncertainty surrounding U.S. tariffs, which has contributed to lower demand for safe-haven assets like XAU/USD. If the Fear & Greed Index remains consistently in neutral territory, gold demand may continue to gradually decline.

Another key factor to consider is that, in recent weeks, gold has experienced a sharp revaluation, approaching the $3,000 per ounce threshold. Reaching a new all-time high at a key psychological level often leads to profit-taking, creating selling pressure on XAU/USD. This effect could be contributing to the recent downward correction, following the prolonged uptrend seen in gold prices.

Technical Outlook for Gold

Source: StoneX, Tradingview

• Accelerated Trend: The gold chart maintains a strong long-term uptrend. However, since early January, price movements have shown a notable acceleration, forming a steeper short-term uptrend. Currently, levels above $2,900 per ounce appear to be facing resistance, suggesting that the recent strong rally could lead to minor downside corrections before the market decides to resume the broader uptrend in XAU/USD.

   

• RSI: The RSI line has remained above overbought levels (70), signaling a strong buying imbalance. This excessive bullish pressure could lead to frequent downside corrections as the market seeks to consolidate more sustainable levels.

   

  Key Levels to Watch:

   

• $3,000: A tentative resistance level, tested in recent sessions. A breakout above this key psychological threshold could further strengthen bullish expectations, driving continued buying pressure in the short term.

   

• $2,850: Nearby support, aligning with neutral candles formed in recent trading sessions. This could be the zone where pullbacks occur, influenced by the prior strong rally and overbought conditions.

   

• $2,800: A major support level, corresponding to the highs of the last three months and aligning with a short-term uptrend line. A break below this level could intensify bearish sentiment, triggering a stronger selling wave.

By Julian Pineda, CFA – Market Analyst