Gold fluctuated in a relatively tight channel during the first half of the week but slumped to its weakest level in two months at $1,753 late Wednesday. The precious metal, however, managed to stage a decisive rebound and broke above $1,800 on Friday, snapping a four-week losing streak.
• Gold staged a sharp U-turn after dropping toward $1,750 earlier in the week.
• Risk aversion amid heightened inflation fears is boosting the yellow metal.
• Next target on the upside for XAU/USD is located at $1,835.
What Happened Last Week
1. After moving sideways and closing little changed on Monday, XAU/USD came under bearish pressure on Tuesday. The data from the US revealed that producer prices increased at their strongest pace in more than a decade with the Producer Price Index (PPI) soaring to 9.6% on a yearly basis in November. Investors started to price in a hawkish Federal Reserve policy outlook and gold fell toward the lower limit of its two-week-old range near $1,770.
2. On Wednesday, the Fed announced that it will double the pace of asset taper to $30 billion per month from mid-January. More importantly, the updated Summary of Economic Projections, the so-called 'dot plot', showed that policymakers' median forecast pointed to three rate hikes in 2022. The hawkishness of the Fed's policy statement caused gold to slump to its weakest level since early October at $1,753.
3. On Thursday, the Bank of England (BOE) hiked its policy rate by 15 basis points and said that inflation could reach 6% by April of 2022. The European Central Bank (ECB) announced that it will end the Pandemic Emergency Purchase Programme (PEPP) in March.
4. In addition to inflation fears, reports suggesting that the coronavirus Omicron variant is much more contagious than the Delta variant weighed heavily on market sentiment in the second half of the week.
News to Follow
1. The risk perception will continue to impact financial markets at the start of the next week in the absence of high-tier macroeconomic data releases. Gold is likely to find demand as a traditional safe haven if investors remain concerned over the potential negative impact of the Omicron variant on activity and inflation outlook.
2. On Wednesday, the US Bureau of Economic Analysis will release its final estimate of the third-quarter Gross Domestic Product (GDP). Investors expect the annualized GDP growth to be left unchanged at 2.1% and the market reaction is likely to be muted.
3. On Thursday, the Personal Consumption Expenditures (PCE) Price Index, the Fed's preferred gauge of inflation, will be looked upon for fresh impetus. Ahead of the Christmas break, market participants could ignore this inflation report since they already know what the Fed's plan to control price pressures look like.
• On the upside, XAU/USD could target $1,812, $1,826 and $1,845$.
• First support now aligns at $1,788, $1,774 and $1,762.