Gold price forecast: XAU/USD lacks directional conviction on conflicting market forces

Gold prices (XAU/USD) rose 0.7% to ~1,945$ for the week, despite broad-based U.S. dollar gains and soaring rates. Over the five-day period, the DXY Index jumped 1.3%, while Treasury curve shifted sharply higher after the Federal Reserve signalled in no uncertain terms that it is leaning towards front-loading hikes and outlined an aggressive plan to prune its balance sheet to cool down inflation.

Typically, greenback strength in the forex space and rising nominal and real yields should be enough to undermine precious metals, which offer no coupons, dividends, or tangible cash flows. But these are not normal times, to say the least.

First, the geopolitical premium built into the market following the invasion of Ukraine has kept prices of some defensive assets afloat. Although the military conflict has not escalated dramatically in recent days, the war is still raging, and its horrors are multiplying. It is difficult to predict how the crisis will play out, but some investors believe that the worst is not over and are therefore reluctant to start trimming safe-haven positions.

There is another reason why gold has remained supported: the growing fear of recession. Many Wall Street observers are increasingly convinced that the Fed will not be able to lower consumer prices without triggering a significant downturn. Whether or not those expectations are justified is another matter, but fragile sentiment reflected in high volatility and weakness in equities is prompting traders to hedge against potential downside risks.

Conflicting market forces will prevent gold from rising or falling meaningfully until one of the catalysts acquires an advantage and a clear preponderance over the other. This means that the near-term trading outlook for XAU/USD is neutral. In this context, prices are likely to remain stuck around current levels, lack directional conviction and show ranging behaviour in the coming days.

In terms of economic releases to watch, the week ahead has several high-impact events, but the latest inflation report is likely to receive the most attention. The headline CPI, to be published on Tuesday, is anticipated to rise from 7.9% y/y in February to 8.4% y/y in March, the highest level since early 1982.

While a red-hot CPI result may spark a bullish knee-jerk reaction in gold, gains may not last long as investors are becoming convinced that the Fed will move forcefully to raise borrowing costs to neutral fast, with more than 225 bp of monetary tightening already priced in for the remaining of the year.

On the other hand, a softer-than-forecast CPI print should reinforce the recent decline in inflation breakeven rates, pushing real yields higher, a situation that could create some temporary downward pressure on XAU/USD (for reference, the 10-year TIP has surged over the past month and is almost positive, rising from a low of -1.08% in March 8 to -0.179% before the weekend).