Volatility is likely to increase in the week ahead amid a lack of liquidity and especially if there are stronger-than-expected U.S. inflation releases. Dollar trends will be the most important influence on gold, with administration opposition to further U.S. gains likely to trigger a U.S. correction.

Gold was subjected to sustained selling pressure for most of the week as dollar strength was the dominant market influence. Spot prices briefly weakened to a 16-month just below $1,205 per ounce before finding some relief as the U.S. currency corrected weaker after the latest U.S. employment report, Treasury yields edged lower and the Chinese yuan rallied. There was still a net weekly decline, the seventh in the past eight weeks. Dollar trends will again be a key market influence during the week ahead and will probably be the most important fundamental factor.

As far as U.S. domestic releases are concerned, inflation trends will dominate the data releases, with producer prices data on Thursday and the consumer prices (CPI) release on Friday. In particular, the CPI data will be very important for market sentiment, especially given recent turbulence in bond markets. Any evidence of stronger upward pressure on prices would have important implications. There would be increased pressure for a faster pace of Federal Reserve policy tightening, with the potential for further upward pressure on yields.

The currency implications could still be mixed amid fears that the U.S. economy will be vulnerable to a hard landing, especially if there is evidence of stagflation. Higher U.S. inflation would also potentially boost gold demand as an inflation hedge. Market attention is also liable to focus on the U.S. budget and trade deficits, with the prospect of annual budget deficits in excess of $1 trillion over the next few years liable to increase fears over longer-term U.S. solvency.

U.S.-China trade developments will be an important market influence, especially with increased yuan volatility. After weakening to fresh 14-month lows, the People's Bank of China (PBOC) stepped in to strengthen the Chinese currency, with the yuan regaining ground. This intervention also helped trigger a wider U.S. dollar correction, which underpinned gold. Evidence that the PBOC wants to resist further losses would provide net gold support.

In contrast, a further escalation in trade tensions and aggressive rhetoric from both the U.S. and China would tend to put renewed downward pressure on the yuan. Gold would tend to lose ground on dollar strength, although complacency over a lack of defensive demand would be dangerous, as sentiment could reverse sharply. Rhetoric from President Trump and Treasury officials will also need to be watched closely, especially if the yuan weakens further. There is an important risk that fresh U.S. gains could trigger verbal intervention and a warning against currency manipulation, which would potentially trigger sharp gains for gold.

The latest CFTC data recorded a third successive weekly decline in the net long, non-commercial gold position to just over 35,000 contracts. This is the lowest long positioning since early January 2016, when gold traded around $1,080 per ounce. The overall positioning shift will continue to lessen the risk of further aggressive selling.

A lack of liquidity will continue to be an important market factor during the week ahead, with a peak in the U.S. and European Summer holiday season. The risk of erratic trading across all asset classes including precious metals will persist, with underlying volatility liable to increase. A lack of liquidity will magnify the risk of a technical break but also increase the potential for a rapid reversal.