Gold price forecast: XAU coils as inflation and recession odds conflict

Gold prices trimming overnight gains as APAC stocks catch a bid; oil prices and recession risk odds key to XAU’s short-term direction and XAU/USD trades in a tight range as a possible shift in direction looms.
Gold prices are trimming gains after stocks on Wall Street turned negative overnight. The yellow metal benefited from its appeal as a hedge against stock market declines. The Nasdaq-100 Index (NDX) snapped a two-day win streak, ending the day 0.16% lower. Asia-Pacific stocks are largely higher in Thursday trading, explaining gold’s move lower. Federal Reserve Chair Jerome Powell inflamed fears over a global recession in his testimony before the Senate Banking Committee early this morning.

Mr. Powell’s comments are of particular importance to XAU/USD as the US central bank raises rates to battle rising prices. Inflation has helped to prop up bullion, but it faces headwinds from higher Treasury yields induced by the FOMC’s actions. Higher government bond yields are typically negative for gold because it is a non-interest-bearing asset.

Meanwhile, market-based inflation bets have eased, in part due to the Fed’s 75-basis-point rate hike. The two-year US breakeven rate fell to 3.68% on Wednesday, its lowest point since February. That drop suggests that the Fed’s efforts to quell inflation are working as intended. Moreover, sliding oil prices is another factor likely influencing gold prices, with oil being a key driver of broader inflation. WTI crude prices are down nearly 5% from Monday, extending last week’s 8.5% drop.

That drop in oil is reflective of increasing recession odds, something that may benefit gold. That puts gold in a precarious position between conflicting fundamentals. Investors are attracted by gold during recessions, as XAU provides a store of value. The final June Michigan consumer sentiment survey will see updated consumer expectations on inflation this Friday, which may sway inflation expectations.

The remainder of this week is rather quiet for economic events, but an update to the Atlanta Fed’s GDPNow real GDP estimate is due out on Monday, June 27. The most recent update saw the gauge for second-quarter GDP growth fall to 0.0%, which attracted notable attention. A drop into negative territory in the next update may spark some volatility in the precious metals market.

XAU/USD technical forecast

Prices have coiled tightly just above the 1830 level since Monday. During the same time, the Relative Strength Index and MACD have stabilized below their respective midpoints. The behavior may suggest that a breakout or breakdown may be in order. To the downside, the psychologically important 1800 level may serve as support. Alternatively, the 61.8% Fibonacci retracement or an ascending trendline may cap prices.

XAU/USD daily chart

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