Gold Price Forecast: XAU/USD is firm on softer US yields ahead of critcal CPI

• Gold could depend on the outcome of Wednesday's US CPI data.
• The current price is a few bucks shy of the golden ratio, 61.8% level.
• If CPI were to disappoint, then a subsequent break of $1,815 would be significant.

The gold price is higher on Tuesday by some 0.35% at the time of writing in the afternoon of the New York session. Gold is trading at $1,795.55, just below the highs of the day. Gold has moved higher from a low of $1,783.31 and reached the psychological $1,800 mark at the start of Wall Street.

Gold is firm due to a softer US dollar at the start of the week. The greenback, as measured by the DXY index fell to a low of 105.97, reversing all of the gains made on the blockbuster Nonfarm Payrolls report when it rallied to a high of 106.93.

Additionally, gold is enjoying some relief in lower US yields. Waining yields are bullish for gold since it offers no interest. The US 10-year note made a fresh corrective low of 2.746% on Tuesday but they have since recovered to a high of  2.816%. Nevertheless, yields are way off their 52-week range high of 3.497% printed in mid-June 2022. 

US CPI data will be key

Markets are fixated on the US inflation data coming on Wednesday where prices likely rose by a level that will prompt further interest rate hikes from the Federal Reserve. Combined with last week's NFP report, the Fed is expected to hike interest rates by another 75 basis points at the next Fed meeting in September.

''While a slowing headline reading could lead some investors to believe the Fed can stop hiking, we expect the Fed to take rates to 3.75% by December,'' analysts at TD Securities argued, given that the consensus is that CPI will have risen less in July by comparison to what June's reading showed, 9.1% vs. 8.8% expected whereas tomorrow's data is expected to come below 9%. 

Historical data chart

''The market needs to decide whether the slowing headline is more important than the sticky and strong core,'' analysts at TD Securities said. ''The USD remains sensitive to US data surprises. ''We will be short-term focused on whether this number shakes resilient risk sentiment, as that will also help inform near-term USD price action.''

Consequently, for gold, the data will be a driver. A stronger-than-expected reading could be the catalyst for a final shake-out of stubborn and stale shorts within the volatility ahead of the next significant move to the downside. On the other hand, if the US dollar were to sell off on a lower reading, then a deeper bullish correcting in gold prices would be expected. 

Analysts at TD Securities note that gold prices are ''flirting with the threshold for CTA short covering, but have thus far failed to sustainably break through key trigger levels associated with a significant buying program, which could point to informed participants on the offer.''

''Meanwhile, prop traders are still holding a massive amount of complacent length, suggesting we have yet to see capitulation in gold, which argues that the pain trade remains to the downside.''

Gold technical analysis

As per this week's pre-market open analysis Gold, Chart of the Week: The bulls are up against strong headwinds, and yesterday's New York session commentary, Gold Price Forecast: XAU/USD bulls stay the course but bears are lurking, the weekly gold chart and the daily 10-year yields remain as compelling features in the overall picture for gold.

The yield has corrected towards the neckline of the W-formation on the daily chart within the lower boundary of the broadening formation.

In turn, should the price hold above the flagged levels on the chart above, then a break of the trendline resistance could result in a rally in yields, a weight for gold prices. 

On the other hand, the weekly chart's correction is yet to reach a 61.8% golden ratio as follows:

The current price is a few bucks shy of the level, but should the data reconfirm the sentiment in the market, then gold would be expected to come under pressure as illustrated in the weekly chart above.

If the price were to move higher, however, then a break of $1,815 would be significant and likely lead to a deeper correction of the weekly bearish impulse with the 78.6% Fibonacci eyed near $1,836 that has a confluence with the neckline resistance of the M-formation.