Gold Price Analysis: XAU/USD rebounds from fresh weekly lows ahead of key US inflation report

• Spot gold has been ebbing lower ahead of the key US inflation report, with analysts suggesting markets are positioning for an upside surprise.
• XAU/USD hit fresh weekly lows in the low$1770s but is now back to flat on the day around $1775.

Spot gold (XAU/USD) prices have been ebbing lower in recent days the run-up to the all-important release of the November US Consumer Price Inflation report at 1330GMT. Spot prices dropped to fresh weekly lows in the low $1770s earlier in the session, though are now back to flat in the $1775 area. Still, that leaves prices now nearly $20 below earlier weekly highs, with the failure of spot prices to break above the 200-day moving average (which sits at around $1793) at the time seemingly encouraging technical selling.

Expectations are for the headlines rate of YoY inflation to rise to 6.8% in November, though pre-data price action has analysts suspecting that markets are positioning for an upside surprise. Short-end US yields have been on the front foot in recent days, with 2-year yields hitting a fresh post-pandemic high above 0.72% on Friday and real yields are also moving higher. This helped the dollar gain in the run-up to the data, and the stronger dollar/higher real yield combination has been weighing on gold.

Even if there isn't an upside surprise and inflation only rises marginally from October’s YoY rate of 6.2%, that should be high enough to keep the Fed highly concerned about the inflationary backdrop and on course to announce a quickening of its QE taper at its meeting next week. Bear in mind the Fed will also have been watching recent labour market signals, which have been mostly bullish/inflationary; last week’s official labour market report showed the unemployment rate dropping sharply to 4.2% in November, this week's weekly jobless claims data showed initial claims at their lowest since 1969 and JOLTs data for October showed jobs openings rising back above 11M to just below record highs. Many are, as a result, arguing that the US is at/very near full employment.

As far as gold is concerned, last month’s upside surprise was a bullish short-term catalyst as investors sought inflation protection until expectations for a more hawkish Fed (gold negative) took over. Traders are likely unsure how gold would react to another upside surprise this time around. If demand for inflation protection dominates, gold could be headed back to weekly highs and its 200DMA. If bets on a hawkish Fed shift dominate, gold could be headed under recent lows in the $1760s.