XAU/USD fate hinges on US CPI after key 21-day SMA breaks

• The price of gold defends $2,600, a three-week low, as US CPI data comes out.
• The US dollar sees a modest retreat as stimulus optimism from China lifts market sentiment.
• Gold price drops 21-day SMA at $2,622, but upbeat daily RSI keeps buyers alive.

The gold price is down more than $2,600 early Thursday after falling for a sixth straight day on Wednesday. The shiny metal is at its lowest level in three weeks ahead of the release of all-important US Consumer Price Index (CPI) data on Thursday.

All eyes remain on US CPI inflation data

According to CME Group’s FedWatch tool, markets continue to price in an 82% chance that the US Federal Reserve (Fed) will opt for a 25 basis point (bps) interest rate cut in November. Market expectations about the Fed’s next policy move did not change, even though the September Fed meeting minutes read softly.

The minutes showed on Wednesday that a substantial majority of officials supported a whopping 50 bps rate cut to balance confidence in inflation with concerns about the labor market.

So US consumer inflation data for September holds the key to completely ruling out the likelihood of a Fed rate cut, supported by a surprisingly strong US non-farm payrolls report that suggested the labor market is in a healthier state than originally feared.

Annual CPI is seen rising 2.3% in September after rising 2.5% in August. Core CPI is set to hold steady at 3.2% YoY over the same period. On a monthly basis, US CPI inflation is expected to ease slightly to 0.1% in September from 0.2% in August. The core figure is also likely to fall to 0.2%, after a 0.3% rise in August.

A bigger-than-expected drop in both annual and monthly CPI inflation data could revive hopes for an excessive Fed rate cut next month, triggering a further correction in the US dollar (USD) against its main rivals . The price of gold could see a strong rebound based on aggressive Fed expectations and the potential demise of the USD.

On the other hand, markets may even reduce bets on a 25 bps rate cut in November if US CPI data surprises on the upside over time. In such a scenario, the price of non-interest-bearing gold could be the most affected, while an extended recovery in the greenback is expected.

Anticipating this week’s main event risk, US CPI data, traders appear disengaged and refrain from placing new bets on the shiny metal. Gold prices, however, are drawing some support from the latest stimulus news from China.

On Wednesday, China’s Ministry of Finance announced that it would launch a CNY 2 trillion fiscal stimulus package on Saturday to support economic growth. Meanwhile, the People’s Bank of China (PBOC) on Thursday launched a CNY 500 billion exchange facility for securities, funds and insurance companies to boost domestic stock markets.

Gold Price Technical Analysis: Daily Chart

Buyers continue to defend their positions even after the price of gold closed below the key 21-day simple moving average (SMA) support on Wednesday, then at $2,619.

With the 14-day Relative Strength Index (RSI) still holding above the 50 level, gold buyers remain bullish on a potential recovery.

On the downside, immediate support is seen at the $2,600 mark. A sustained break below the latter could extend the decline towards the September 20 low of $2,585.

Alternatively, gold price needs to recover the 21-day SMA support turned resistance, now at $2,623, to reactivate the uptrend.

The next bullish targets are seen at the psychological barrier of $2,650 and intermittent highs near $2,670.