Gold Price Forecast: XAU/USD appears fragile near $1,925 key support amid China, inflation woes

• Gold Price prods multi-month-old support as China, inflation concerns weigh on sentiment.
• US Dollar remains firmer despite mixed United States data, pullback in yields, exerting downside pressure on XAU/USD.
• China statistics, fears in banking, realty sector join mixed feelings about inflation, Federal Reserve talks to keep Gold sellers hopeful.
• Firmer inflation can join tighter labor markets to underpin hawkish central bank bias and exert more downside pressure on XAU/USD.

Gold Price (XAU/USD) remains on the back foot at the lowest level in a month, poking an upward-sloping support line from February around $1,925 amid the early hours of Wednesday’s Asian session. In doing so, the yellow metal justifies the firmer US Dollar and the market’s fresh fears emanating from the banking and real estate sector ahead of the top-tier inflation clues from China and the United States.

Gold Price drops on firmer US Dollar, risk aversion

Gold Price marked the biggest daily loss in a week the previous day after market sentiment roiled amid downbeat concerns about China, as well as the broad baking and real estate sector. Also, fears emanating from Italy’s tax surprise and mostly upbeat United States data allowed the US Dollar to remain firmer and weigh on the XAU/USD price.

On Monday, US Goods and Services Trade Balance for June came in at $-65.5B versus $-65B expected and $-68.3B prior whereas the NFIB Optimism Index for July improved to 91.9, the highest in nine months, from 91.0 previous readings and 90.6 market forecasts. Further, US IBD/TIPP Economic Optimism for August eases to 40.3 from 43.0 market forecasts and 41.3 prior whereas Wholesale Inventories for June dropped to -0.5% versus the analysts’ estimations of reprinting the -0.3% figures.

It should be noted that Philadelphia Federal Reserve Bank President Patrick Harker advocated Fed’s policy pivot while saying, per Reuters, “I believe we may be at the point where we can be patient and hold rates steady and let the monetary policy actions we have taken do their work.” On the other hand, Richmond Fed President Thomas Barkin stated that the Gross Domestic Product (GDP) remained "solid". 

Talking about the risk catalysts, China’s headline Trade Balance improves in July but the details suggest deteriorating Imports and Exports for the said month, suggesting the economic challenges for the Dragon Nation which already suffers from geopolitical woes. That said, India bans drone makers from using Chinese equipment after stopping the imported laptops and computers previously.

Furthermore, Chinese real estate giant Country Garden announced missing two dollar bond coupons due on August 6 totaling $22.5 million per Reuters. The news renews fears of bankruptcy among the realtors in China even if the Country Garden has a 30-day grace period to avoid such hardships.

Additionally, concerns about rating giant Moody’s downgrading to nine United States banks joined Fitch Ratings’ downgrading of cutting the credit rating and warning about the outlook of a few US financial institutions renewed banking fears. That said, Italy’s announcements of a surprise windfall tax on bank profits exert downside pressure on the Euro and allow the US Dollar to remain firmer, which in turn weighs on the Gold Price.

Against this backdrop, Wall Street closed in the red with major losses among the bank stocks whereas the US 10-year Treasury bond yields dropped to the weekly low of around 3.98% before bouncing off 4.03% by the day’s end. Also, the US Dollar Index (DXY) jumped the most in a week before ending Tuesday’s North American session around 102.55.

Inflation, and risk catalysts are the key to further XAU/USD direction

With China’s headline inflation data comprising the Consumer Price Index (CPI) and Producer Price Index (PPI) scheduled for release on the calendar, the Asian trading for the Gold Price may become entertaining. That said, the CPI is likely to suggest deflation in one of the world’s biggest XAU/USD consumers while posting -0.4% YoY figures versus 0.0% prior whereas the PPI is expected likely to improve to -4.1% YoY from -5.4% prior.

Given the likely weaker inflation data from China, the Gold Price may witness further downside on the price pressures matching the forecasts. Even so, improvement in the market’s sentiment may allow the Gold bears to take a breather at the key support line.

Gold Price Technical Analysis

Gold Price extends a downside break of the 50-DMA as it pokes an upward-sloping support line from late February, close to $1,925 by the press time.

Adding credence to the downside bias for the XAU/USD price are the bearish signals from the Moving Average Convergence and Divergence (MACD) indicator.

It’s worth noting, however, that the Relative Strength Index (RSI) line, placed at 14, remains below 50.0 and suggests bottom-picking, which in turn highlights the 61.8% Fibonacci retracement of the Gold Price run-up from late February to May, near $1,910.

In a case where the XAU/USD drops below $1,910, the $1,900 round figure will precede the 200-DMA surrounding $1,897 and June’s bottom of near $1,893 to challenge the further downside.

Meanwhile, the Gold Price recovery needs to provide a daily closing beyond the $1,942–45 resistance confluence comprising the 50-DMA and 50% Fibonacci retracement.

Following that, a three-month-long descending resistance line surrounding $1,960 will be crucial to watch as it holds the key to the XAU/USD’s further advances.

Overall, the Gold Price is likely to witness further downside but there prevails a limited room towards the south.

Gold Price: Daily chart

Trend: Limited downside expected