FX.co ★ XAU/USD, GOLD

Gold (XAU/USD) clings to modest recovery gains around $4,450 through the first half of the European session, albeit it lacks bullish conviction as traders await the release of US consumer inflation figures. Meanwhile, the US Producer Price Index (PPI) report, released on Thursday, lifted Federal Reserve (Fed) rate-hike bets. This continues to act as a tailwind for the US Dollar (USD) and caps the upside for the non-yielding bullion. According to Commerzbank's Michael Pfister, markets "will have very little time to breathe" as "the US CPI number released today could tip the balance for the upcoming Fed meeting next week." He believes that the number will play an important role not just for this particular monetary policy decision but also for the US Dollar, as "at this point, markets expect about 80 basis points of further rate hikes by the middle of next year from the Fed because of increased oil prices and expectations of +0.4% month-on-month increase in headline CPI." At the same time, core inflation remains lower, and doubts about the new Fed Chair's reaction function persist. The US Bureau of Labour Statistics (BLS) data released on Thursday showed that the PPI picked up momentum to a yearly pace of 5.4% in August, up from the prior month's revised reading of 4.8% and projections of 5.3%. The core measure of the index rose in line with forecasts, advancing 4.6% year on year from 4.3% in July. This follows inflation concerns driven by higher oil prices and supports expectations of another interest rate hike by the US central bank next week. In reality, crude oil prices surged to levels not seen since May 21 as tensions between the US and Iran continued to escalate. The US Treasury plans to punish an undisclosed major bank on Monday in its bid to apply economic pressure on Iran. On the other hand, the Houthi rebels in Yemen, backed by Iran, have taken control of the strategically important Red Sea city of Mocha, thus increasing worries in the market over disruptions in oil supplies. Meanwhile, US President Donald Trump has indicated that the war against Iran is bound to continue until after the November midterm elections, maintaining the geopolitical risk premium that could prop up crude oil prices and the safe-haven US Dollar. Therefore, a robust US CPI reading would send the USD higher, and traders should be cautious about buying gold. However, the precious metal is on course for a weekly loss. Gold is currently trading just above the 50% retracement at $4,320 and the 200-day Exponential Moving Average (EMA) at $4,313, providing some support based on key medium-term technical levels. However, momentum oscillators look weaker now, as both the MACD and RSI are below their key levels of 0.00 and 50, respectively. On the upside, the first resistance is at the 38.2% Fibonacci retracement level of $4,409, while further up we have a solid resistance zone at the 23.6% retracement level of $4,519. Moving lower, the first support is at the 50% retracement of $4,320, supported by the 200-day EMA at $4,313. A move below this level will take us towards the 61.8% retracement level of $4,231 and then the 78.6% level of $4,104, with the previous cycle low of $3,943.