Gold Price Forecast: US Dollar dominance keeps weighing on XAU/USD ahead of US PCE inflation

Gold price remains bearish despite improving market mood.
US Dollar stays dominant after US Gross Domestic Product growth disappointed on the second estimate for Q4 2022.
PCE disinflation should continue, but any surprise could have a notable impact on Gold.

Gold price continues to slowly trend down on Friday as the US Dollar strength remains on most of the market board despite 10-year US Treasury bond yields declining below 3.9% on Thursday, which still failed to trigger gains for the yield-less bright metal, although it helped to limit the downside somewhat. Positive weekly Jobless Claims data improved the market mood as the US labor market does not seem to be showing any signs of deteriorating. Gold price is dealing with levels close to year-to-date lows around $1,820, which is acting as support.

Market eyes turn now to the US Personal Consumption Expenditures (PCE) Price Index release, the Fed’s preferred measure of inflation, scheduled for 13:30 GMT.

Gold news: US PCE disinflation to continue, but how fast?

The US Bureau of Economic Analysis (BEA) will publish the PCE Price Index, the Fed’s preferred gauge of inflation, before Friday’s Wall Street opening. Gold traders and investors will watch the data release closely, as Core PCE inflation is forecast to rise by 0.4% on a monthly basis, but the annual figure is expected to decline to 4.1% in January from 4.4% in December. The market reaction should be straightforward, with a softer-than-expected monthly PCE inflation weighing on the US Dollar and vice versa, with Gold price reacting the opposite way.

Considering that the CPI report already revealed that inflation remained sticky in January, it would be surprising to see this data have a long-lasting impact on markets.

Yohay Elam, Senior Analyst at FXStreet, believes that high PCE inflation expectations give room for some US Dollar retracement, which would help Gold price bulls:

Zooming out, the world’s reserve currency has been dominant since the super-strong Nonfarm Payrolls report for January. Yet every trend has a counter-trend. Even if Core PCE comes out at 0.4% as expected, I believe it would trigger an “it could have been worse” outcome in markets.

It would probably take a surprising 0.5% read to reinforce the notion that inflation is out of control and needs even stricter tightening from the Fed.

Gold price downside capped by volume

Pablo Piovano, Senior News Editor at FXStreet, reports that despite the current downtrend, Gold price downside seems capped by shrinking open interest in the futures market:

Gold prices dropped for the third straight session on Thursday. The downtick, however, was amidst shrinking open interest and hints at the likelihood that a deeper drop appears somewhat curtailed for the time being. Immediately to the downside in the precious metal comes the key $1800 region per ounce troy.

Gold price in 2023: Up-and-down action

Financial markets have been a two-tale story for the early part of 2023, in which Gold price has reflected in its price action like no other asset. XAU/USD rode an uptrend during all of January with the market optimism about inflation slowing down and constant Federal Reserve dovish talk, only to see a drastic turnaround back to the old dynamics in February after a hot US Nonfarm Payrolls (NFP) report. The US economy adding more than 500K jobs in the month of January shifted the market expectations for the Fed easing its monetary policy, and the US Dollar has come back to the market King throne.

Gold price opened the year at $1,823.76 and reached a year-to-date high of $1,960 on February 2, right in between the first Federal Reserve meeting of the year and the surprising release of the US jobs report for January. Since then, the ongoing downtrend has been relentless, reaching levels close to the yearly open, around $1,830.