The dollar has continued to show signs of losing momentum against European currencies, which will limit the scope for gold selling unless there is an extremely strong U.S. CPI release and pressure for the Fed to accelerate monetary tightening. Gains are still likely to attract selling interest quickly with no evidence yet of a sustained recovery.
Gold declined to fresh 11-month lows at the beginning of the week before correcting higher as the dollar lost overall traction. There was, however, selling interest above $1,260 per ounce and consolidation around $1,255 at Friday's European close. Stabilization in the Chinese yuan helped underpin risk sentiment, and gold tended to benefit as the dollar lost support. U.S. currency trends will continue to be a key market focus during the week and will inevitably have an important impact on gold.
The producer prices data will be released on Wednesday. The main U.S. focus will be on CPI inflation data due for release on Thursday. Pressure for the Federal Reserve to adopt a more hawkish policy stance will increase if the inflation data come in stronger than expected. U.S. long-term bond yields have tended to move lower over the past month, but stronger than inflation data would risk a reversal in market sentiment and increases in yields that would make it more difficult to make headway.
Commentary from Federal Reserve officials will be monitored closely during the week, with Fed Chair Powell's important semi-annual testimony to Congress due the following week. Futures markets indicate that the probability of a September rate hike is just below 80%, and gold will gain support if the probability slips during the week ahead. Overall dollar selling is still likely to be limited, which will limit overall gold support.
Gold performance will also be influenced by whether precious metals trade more as commodities or defensive assets. During the past few weeks, gold has, unusually, been unable to gain significant support on defensive grounds. In contrast, gold has traded more like a commodity and tended to perform better when risk appetite has improved, especially as commodity currencies have rallied in these circumstances. A crucial factor during the week ahead will be whether this trend is sustained or whether gold reverts to being seen more as a defensive asset.
The latest CFTC data will be released on Monday due to the U.S. holiday. Any further reduction in long positioning will tend to limit the scope for further aggressive gold selling, although contrarians will not be convinced over a longer-term shift and potential for sustainable gains until there is a net short speculative position.