• GBP/USD is expecting further downside to near 1.2000 ahead of US Inflation.
• Fears of an upside surprise in US inflation and back-to-back Pentagon events are portraying a risk-off impulse.
• UK FM Jeremy Hunt is confident that the UK inflation will be halved if the administration sticks to its plan.

The GBP/USD pair is displaying a sideways action around 1.2050 in the early Asian session. The Cable is expected to display further downside as the odds of a policy tightening pause by the Federal Reserve (Fed) have vanished entirely and more interest rate hikes are expected to continue its battle against stubborn inflation.

Renewed concerns of more policy tightening by the Fed and disappointed quarterly earnings forced S&P500 to settle last week with the highest losses since December. This has strengthened the risk-aversion theme further. Also, the Pentagon shot down an unidentified object over Alaska on Saturday. This is the second event in less than a week after the Pentagon shot down the spy Chinese balloon, which was later identified as a civilian by the Chinese administration. The events are portraying more traction for the risk-off impulse.

The US Dollar Index (DXY) looks set to add gains above 103.35 ahead of the United States Consumer Price Index (CPI) data, scheduled for Tuesday. A Reuters poll expects further upside in the monthly headline and core inflation by 0.4%.

Philadelphia Fed President Patrick Harker reiterated his view that the central bank will continue hiking interest rates to above 5%. The Fed policymaker has favored a small interest rate hike and sees no recession ahead. Also, the expression of a rate cut is unlikely this year.

On the United Kingdom front, preliminary Gross Domestic Product (GDP) data for Q4 remained stagnant as expected by the market participants. Also, the annual GDP matched expectations of 0.4% expansion vs. the former release of 1.9%. The Manufacturing and Industrial Production remained negative but managed to deliver less contraction than expected.

UK Finance Minister Jeremy Hunt said “The fact the UK was the fastest growing economy in the G7 last year, as well as avoiding a recession, shows our economy is more resilient than many feared." He further added, “If we stick to our plan to halve inflation this year, we can be confident of having amongst the best prospects for growth of anywhere in Europe.”

• On the hourly chart, 0.6950 is a key level that if broken, could seal a bullish thesis for the days ahead.
• Bears eye a move to test key structure around 0.6920/00.

AUD/USD bears were unconvincing on Friday and we have seen little in the way of a commitment so far in the open on Monday, albeit in very early days in an illiquid open.

With that being said, we are down low in the 100 pip box between 0.6900 and 0.7000 and we may continue to work the lows for some time until the bulls make their major move, if at all. 

The following illustrates an upside bias due to the daily M-formation and major support zone:

AUD/USD daily chart

We have already seen moves towards the neckline but they were faded pretty fast. However, arguably, this only makes for a stronger case to move up again as the initial tests have created a pool of liquidity. 

Given that we still have not had a breakdown of structure to the downside, below 0.6920/00, and confirmation that a break thereof was not just a stop hunt, (to say 0.6870 and reversal), a bullish thesis can still be valid for the opening balance of the week:

AUD/USD H1 chart

On the hourly chart, we have 0.6950 to clear before a bullish thesis can be solidified, so it is a case of seeing how the opening range on Monday develops. However, while holding above the trendline and said support, there are prospects of a short squeeze to test 0.6950 for the day ahead. That does not rule out a move into low-hanging fruit below 0.6900 and into the 0.6880s before hand. 

• Gold price begins week’s trading with minor gains after mildly offered weekly closing.
• Firmer United States statistics, US Treasury bond yields help Federal Reserve hawks and weigh on Gold price.
• US-China tension contrasts with cautious economic optimism to challenge XAU/USD bears.
• US Consumer Price Index, China-linked headlines will be crucial to convince Gold sellers amid US Dollar rebound.

Gold price (XAU/USD) kick-start the key week with mild gains around $1,865 as traders brace for the key United States inflation data. Even if the yellow metal is up 0.09% intraday at the latest, the XAU/USD bears remain hopeful as the latest lot of the US statistics have been impressively favoring the hawkish Federal Reserve (Fed) officials. Also favoring the Gold bears are the US-China tension and the firmer US Treasury bond yields, not to forget the US Dollar rebound.

Upbeat United States economics lure Gold bears

Having witnessed a retreat in the US Dollar during the last 2022’s, the return of strong United States data teases the Gold sellers as markets prepare for the key US Consumer Price Index (CPI) data for January.

On Friday, the preliminary readings of the US University of Michigan (UoM) Consumer Sentiment for February rose to 66.4 versus 65.0 expected and 64.9 prior. Further, the UoM noted that the year-ahead inflation expectations rebounded to 4.2% this month, from 3.9% in January and 4.4% in December.  “Long-run inflation expectations (5-year) remained at 2.9% for the third straight month and stayed within the narrow 2.9-3.1% range for 18 of the last 19 months,” Stated UoM.

It’s worth noting that the key US sentiment gauge jumped to the highest in over a year and has a likely strong positive impact on the US inflation data, which in turn can weigh on the Gold price, as the trends between confidence and spending are closely related.

Hawkish Federal Reserve officials weigh on XAU/USD price

As the recent United States Consumer Sentiment gauge and the inflation expectations join the previous employment numbers, the Federal Reserve (Fed) hawks are likely to reiterate their calls of “way to go” for policy pivot, even if Fed Chair Jerome Powell appears reserved of late.

Richmond Federal Reserve (Fed) President Thomas Barkin also joined Fed Chair Powell’s league to challenge the Gold bears, backed by higher US Jobless Claims, but the majority of others on the board are quite hawkish and can challenge the XAU/USD rebound.

It should be noted that Philadelphia Federal Reserve President Patrick Harker mentioned on Friday, “We want economy to keep growing, but also to get inflation under control, that's job one,” which in turn suggests hawkish bias at the Fed.

US-China tension, US policymakers’ optimism vs. recession woes probe Gold bulls

In nearly one week, the United States brought down three by air-to-air missiles and allege China of spying, which in turn renewed geopolitical fears among the world’s top two economies and weigh on Gold price. Adding strength to the XAU/USD bear’s confidence could be the US policymakers’ optimism, including US President Joe Biden and Treasury Secretary Janet Yellen, who ruled out recession woes and favor Federal Reserve (Fed) hawks to maintain their bias for higher rates. Additionally, the US Treasury bond yield curve inversion between the 10-year and two-year coupons also harms the Gold price. It's worth observing that the second consecutive weekly gain of the US Dollar Index (DXY) also weigh on the Gold price ahead of the key US data.

US inflation is the key

While a mixed bag of catalysts seems to challenge the Gold traders, this week’s United States Consumer Price Index (CPI) for January will be crucial as it will help clear the doubt over the Federal Reserve’s next moves. Given the hawkish expectations from the inflation numbers, the odds of witnessing two more Fed rate hikes and further downside for the Gold price can’t be ruled out. However, a surprise downtick in the CPI might new the Fed’s “policy pivot” talks and propels the XAU/USD price. It’s worth noting that the US Bureau of Labor Statistics announced on Friday that it revised the monthly Consumer Price Index (CPI) for December to +0.1% from -0.1%, based on updated seasonal adjustment factors.

Gold price technical analysis

A clear downside break of an ascending support line from November 2022, now immediate resistance near $1,875, joins bearish signals from the Moving Average Convergence and Divergence (MACD) indicator, to keep Gold bears hopeful. Adding strength to the downside bias is the steady Relative Strength Index (RSI) line, placed at 14.

However, a daily closing below the 50-day Exponential Moving Average (EMA), currently around $1,857, appears necessary for the XAU/USD sellers to retake control.

Following that, $1,825 may offer an intermediate halt before dragging the Gold price towards a four-month-old horizontal support zone near $1,805. It’s worth noting that the $1,800 round figure will act as an extra filter to the south.

Alternatively, an upside clearance of the support-turned-resistance line, near $1,875, needs to cross the previous weekly top surrounding $1,890 and January’s swing low of $1,900 to recall the Gold buyers.

In that case, a run-up towards $1,950 and the latest swing high surrounding $1,960 can’t be ruled out. However, the further upside appears difficult as the late March 2022 peak surrounding $1,966 could challenge the XAU/USD bulls afterward.

Gold price: Daily chart

Trend: Further downside expected

• EUR/USD is expected to display a downside below 1.0660 as the street fears a surprise rise in US inflation.
• Fed policymakers see interest rates higher for a more extended period as inflation is still elevated.
• ECB policymakers have been reiterating that Eurozone won’t face a deep recession, if it happens it will be shallow.

The EUR/USD pair has showed a pullback move to near 1.0680 in the early Tokyo session. The pullback move by the major currency pair seems to lack strength and is facing barricades in extending its gains. The shared currency asset is likely to display more weakness after surrendering the immediate support of 1.0660 as the risk-aversion theme is gaining more strength.

S&P500 showed recovery late Friday but ended the week on a bearish note amid fresh concerns of a further slowdown in economic activities ahead of the release of the United States Consumer Price Index (CPI), portraying a dismal market mood. Tuesday’s US inflation data will set the undertone for March’s monetary policy meeting by the Federal Reserve (Fed).

The US Dollar Index (DXY) refreshed its two-day high at 103.35 and is expected to deliver further upside amid the risk of a rebound in the declining US inflation trend. The demand for US government bonds remained extremely weak as the street is expecting a surprise upside in the US inflation after a bumper US Nonfarm Payrolls (NFP) report. This supported the 10-year US Treasury Yields to record a fresh monthly high at 3.74%.

A Reuters poll indicates that the monthly headline CPI and core inflation that excludes oil and food prices will escalate by 0.4%. This might force Fed chair Jerome Powell and his mates to look for more interest rate hikes ahead as the battle against inflation could get complex. Last week, Fed policymakers favored the context of higher interest rates for a more extended period as the inflationary pressures are still elevated as the healthy labor market could propel consumer spending.

On the Eurozone front, investors are awaiting the release of the Gross Domestic Product (GDP) (Q4) data, which will release on Tuesday. As per the consensus, the economic data for the quarter and on an annual basis is similar to its former releases at 0.1% and 1.9% respectively. This indicates that the Eurozone economy has not seen a recession in CY2022. Also, European Central Bank (ECB) policymakers have been reiterating that Eurozone won’t face a deep recession, if it happens it would be shallow as the signs of recovery are extremely solid.

The European Central Bank, ECB, Governing Council member Ignazio Visco, who is also the Bank of Italy's governor, was reported saying over the weekend by Reuters that the ECB must avoid pushing real interest rates too high, given the level of private and public debt in the euro area.

He also said he did not believe a recession was inevitable in order to reduce inflation.

"Today, disinflation is obviously needed, but given the levels of private and public debts that prevail in the euro area, we must be careful to avoid engineering an unnecessary and excessive rise in real interest rates," Visco told the Warwick Economics Summit.

"Indeed, I am convinced that the credibility of our actions is preserved not by flexing our muscles in the face of inflation, but by continually showing wisdom and balance."

Key quotes

Visco told the Warwick Economics Summit.

Market implications

The ECB has raised interest rates by 3 percentage points since July and promised a 50 basis-point hike for March and dovish rhetoric such as this can hamstring the euro on bullish breakout attempts. 

EUR/USD hit its highest in 10 months against the dollar earlier this month. However, the euro was on a second straight week of declines on Friday and closed lower by 0.57% at 1.0676. 

Reuters reported that Philadelphia Federal Reserve President Patrick Harker said on Friday in the latest warning from a central banker over the debt ceiling that a default on US government debt triggered by political brinkmanship over federal borrowing limits and the budget deficit would be dire,

"Imagine us as a nation, the leading nation in the world, defaulting on our debt - that's hard to recover from," Harker said at a Global Interdependence Center conference in La Jolla, California. "And our competitors, our enemies, will cheer in the streets."

Key notes

Harker was reported saying. 

Chancellor Olaf Scholz’s Social Democrats lost the Berlin election on Sunday to the conservative Christian Democrats, failing to win the regional vote for the first time in nearly 25 years.

In the polls, the CDU was the strongest party with 27.5%, up from 18% in 2021. Support for the SPD dropped to 18.5% from 21%, its worst result ever, while the Greens were also on 18.5%, compared with 19%, the poll showed. This is the first time that the SPD has failed to come first in a Berlin regional election since 1999, when the CDU won with more than 40% of the vote.

The Guardian reported that the ''US and Canadian military are continuing to search by sea and land amid hostile weather conditions in a scramble to recover portions of three flying objects shot down over North American airspace in the past week.''

''The Democratic majority leader of the US Senate, Chuck Schumer, told ABC’s This Week on Sunday that he had been briefed by the White House and that officials were now convinced that all three of the flying objects brought down by air-to-air missiles this week were balloons. He put the finger of blame firmly on China.''

Related Headlines

US Representative Elissa Slotkin: Military has extremely close eye on object above Lake Huron;

• Update: Michigan Congressman Jack Bergman says US military has "decommissioned" an object over Lake Huron

Michael  McCaul: Suspected Chinese spy balloon "did a lot of damage".

Canada's PM Trudeau: Unidentified object shot down over Northern Canada by Canadian and US aircraft.

Market implications

The markets are taking their geopolitical risks in their stride, focusing instead on sentiment surrounding the Federal Reserve and this week's US data including Consumer Price Index and Retail Sales. 

On Friday, the US Dollar firmed and global equity markets dropped on Friday as rising interest rates and a slew of hawkish central bank officials who are concerned about persistent inflation risks.