XAU/USD rises after PCE data miss, stalls at upper borderline of triangle

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• Gold price pulls back after spiking higher following lower-than-forecast US Personal Consumption Expenditure price data.
• Three Federal Reserve officials say more work needs to be done to bring down inflation.
• Never mind deposits, what about bank’s assets? Questions economist who sees crisis reviving and Gold exceeding $2,000.
• Gold may be forming a triangle in an uptrend. If ‘the trend is your friend’, bulls may be right.

Gold price (XAU/USD) pulls back from its highs on Friday, exchanging hands in the $1,970s at time of writing, as the dust settles after the release of lower-than-expected Core Personal Consumption Expenditure – Price Index (PCE) data from the US. At its high for the day Gold price has touched a critical resistance from a triangle pattern unfolding on the charts, which is keeping traders guessing as the precious metal’s next move.  

Inflation eases in March, could Fed pause?

The preliminary PCE price index data out on Friday showed a slight decline to 4.6% YoY in February when 4.7% had been expected, the same as January. On a monthly basis inflation rose 0.3% versus 0.4% forecast from 0.5% previously. The market response has been for US Treasury yields to pull back, the US Dollar to edge down, with the redult that Gold price popped higher. 

The lower-than-expected inflation data raises the chances the Fed will do nothing at its May meeting and perhaps even that it may actually cut rates later in the year. Lower interest rates favor Gold because they reduce the opportunity cost of holding the precious metal vis-a-vis cash or cash equivalents.  

A gift to Gold bulls from lower-than-expected US data

The PCE data follows the trend of macroeconomic data out on Thursday which was overall poorer than expected. Initial Jobless Claims showed an unexpected rise in the number of out-of-work people claiming unemployment support in the US from 191K to 198K – higher than the 196K forecast by economists. US Gross Domestic Product (GDP) for the fourth quarter also moderated down to 2.6% from 2.7% in Q3, when 2.7% had been forecast.

Friday’s reaction to the data is similar to the overall reaction to the data on Thursday when Gold gained as the US Dollar also sold-off and US Treasury yields pulled back, reflecting investors’ view that the probabilities had slightly decreased for the US Federal Reserve to raise interest rates at their May meeting. 

Fed members say more work needs to be done to bring down inflation

Despite lacklustre US data seemingly painting a more subdued picture of the US economy that suggests rates won’t rise, comments from Fed members seem to signal the opposite. Over the last 24-hours no less than three members of the Federal Reserve Open Market Committee (FOMC) – two of them voting members – have come out at said they think more should be done to combat persistent inflation. 

“Inflation remains too high, and recent indicators reinforce my view that there is more work to do to bring inflation down to the 2% target associated with price stability,” Federal Reserve Bank of Boston leader Susan Collins said in remarks to a gathering of the National Association for Business Economics. It should be noted that Collins is not a voting member of the FOMC. 

Next, Neel Kashkari, head of the Minneapolis Fed said the institution has “more work to do,” but he did not state what form that would take. Kashakari does have a vote on the FOMC.

Finally, Federal Reserve of Richmond President Tom Barkin said in a speech to the Virginia council of CEOs on Thursday that, “If inflation persists, we can react by raising rates further. It was only a few weeks ago that some were calling for a 50-basis-point increase.”

At the time of writing, the Fed Funds Future Curve, a highly considered market gauge of future Fed policy moves was showing an increased 51% chance of a 0.25% hike in May versus a 49% probability of no-change.

This shows a substantial shift from the reading a day ago, when the same indicator was showing ther chances of a Fed hike at only 44%.

Some analysts still expect the Fed to raise rates by more than just one 0.25% hike, before it ends its tightening cycle. Analysts at ANZ Bank, for example, forecast the Gold price to remain capped at current levels as the Fed will continue raising interest rates, possibly to 5.5% (from a current 5.0% level). 

“Further upside in the Gold price looks limited in the short term, as we see the federal fund rate at 5.5%,” says the bank.

“Gold is well supported by US recession fears, easing inflationary pressure and more dovish monetary policy. Nevertheless, the upside looks limited in the near term amid easing banking risks and further Fed rate hikes,” adds ANZ.

Yet the Australian lender also sees more upside as possible on further banking risks, which would increase safe-haven flows to the yellow metal.

Gold to rise as banking crisis not over, says esteemed economist

The banking crisis is far from over and when it reignites the price of Gold will rise above $2,000 an ounce as people grope for safety, according to distinguished economist, David Rosenberg, the founder of Rosenberg Research.  

So far the analysis of the banking crisis has focused on deposit risk but people are ignoring equally disturbing risks from the assets banks hold, argues Rosenberg in an interview with Kitco.com 

“Everybody’s focused on deposit insurance, concentrated uninsured deposits on the liability side of the balance sheet. But you know, the other part of the story is going to be what do the assets look like?” The economist said.

The availability of credit is shrinking, inflation remains high and the US is on the brink of recession. When people tighten their belts the risk of rising default rates on many of the loans held by regional banks could push a fresh tranche of lenders over the edge.

“Nobody talks about the quality of the assets – these traditional loans, especially as they pertain to commercial real estate business loans, credit cards and auto loans. A lot of these loans are held at the regional bank level,” said Rosenberg.

Gold price technicals: Triangle almost complete in uptrend

Gold price continues its steady rise within a probable symmetrical triangle formation most clearly delineated on the 4-hour timeframe chart. XAU/USD has probably completed the fourth leg of the triangle after Gold price hit a high of $1,987 on Friday, peaking just shy of the upper broderline. It is possible it will now reverse at resistance from the borderline and start declining to the lower borderline at about $1,958 in a fifth wave. It could also go higher. Regardless, given the triangle is almost complete there is an increased chance now of a breakout at any time. 

Given the prior trend before its formation was bullish the odds favor an upside breakout, of the same length as the triangle at its widest part or a Fibonacci ratio thereof. This suggests a target of about $2,050 if higher, and $1,890 if the break is lower.

Gold price: 4-hour Chart

Looked at from a broader perspective Gold price continues to make higher highs and lows on the daily chart and the current symmetrical triangle pattern is more probably a continuation pattern than reversal. According to the market maxim, “The trend is your friend until the bend at the end,” the technical outlook thus favors bulls.

Gold price: Daily Chart

A break above the key $2,009 March top would provide confirmation of further upside. The next target for Gold price would then lie at the $2,070 March 2022 highs. 

The key $1,934 March 22 swing low must hold for Gold bulls to retain the advantage. Yet, a break and close on a daily basis below that level would introduce doubt into the overall bullish assessment of the trend. Such a move would probably see a sharp decline to support at $1,990 supplied by the 50-day Simple Moving Average (SMA).