Gold Could Weaken Further After U.S. CPI Hammering

The markets are still reeling from Tuesday’s publication of a hot U.S. inflation report, which forced investors to reverse the trades they had opened in the prior week. We saw stocks plunge, led by the technology sector with the Nasdaq falling more than 5% to record its worst day since the pandemic. Similarly, other low- or zero-yielding assets such as cryptos and precious metals fell as the data reinforced expectations that the Fed will continue with aggressive rate hikes to tame inflation. 

With investors realizing that inflation is proving to be stickier and the U.S. Federal Reserve more determined to fight it with aggressive rate increases, they could not justify holding the metal even at these levels. So, gold gave up the gains made in the prior days to fall momentarily below $1,700, before bouncing off its lows.

At the time of writing, the precious metal was holding some $5 or so above $1,700, but given the moves we saw yesterday, and the breakdown of some key short-term levels on gold, the path of least resistance is once again to the downside.

From here, a drop to a new low on the year looks increasingly likely, especially with the Fed now more likely than not to raise rates by another 75 basis points at least next week and proceed with further aggressive hikes until inflation comes back under control.

From a technical point of view, the reversal in gold prices from around the $1,725 area means the series of lower lows are still intact. A new lower low is what the bears will now be eyeing given the dollar rally, bond market sell-off and now this bearish-looking technical setup. 

A clean move below $1,700 would pave the way for the next big pool of liquidity resting below $1,676, last year’s low. There is presumably where many trapped long traders’ stop loss orders would be resting. Watch out for a sharp move lower as a result. 

If you are bullish on gold, then it might be best to wait until the charts provide us with a clear reversal signal before looking to potentially go long.