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Play of the Day: Consolidation-Breakout Setup on Gold?

Gold volatility has settled into a tight range as traders potentially set up for big moves ahead. What could get gold traders hopping and where could we potentially see gold trade next?

XAU/USD (Gold): 15-min

XAU/USD 15-min Chart by TV

XAU/USD 15-min Chart by TradingView

Due to the tragic events in Israel, gold was a sought after safe haven to start the week, sending XAU/USD $20 higher at the week open. But since then, it’s been mostly sideways action, possibly on several major market centers being closed on Monday, and possibly on the scenario that traders are refraining from making moves ahead top tier catalysts.

That latter scenario is likely with the closely watched U.S. inflation updates ahead, starting with the producer prices  index on Wednesday and the consumer prices index on Thursday. The latter is the more closely watched event between the two, but on net, both will likely influence Gold and the U.S. dollar in the short-to-medium term.

Our CPI Event Guide discusses the data, market expectations, and potential scenarios to watch out for, and with a slight bias for the September read coming somewhere inline to slightly above forecasts and previous reads, it’s possible traders may price raise “hawkish Fed / higher for longer” bets by the end of the week.

That means we may see a scenario where this result draws in not only fresh USD bulls, but likely some profit taking from USD shorts who have benefited from the recent pullback in USD from its recent bullish run in September.

In this scenario, a sustained break below the consolidation is the trigger to watch out for, which could draw in technical sellers as well. If so, a short-term move to $1830 may be in the cards before finding support, an area of previous consolidation and the weekly Pivot Point. With a daily average true range of around $18, this is a possibility within a session or two if volatility is high.

On the other side of the coin, a bullish XAU/USD scenario to watch out for is if U.S. inflation comes inline or below expectations / previous reads, traders may take that as further confirmation of a “inflation / rate hike cycle peak” and further sell USD as we’ve seen in the past week.

A sustained break above the consolidation area may draw in technical buyers at that point, potentially sparking further upside moves in XAU/USD. If so, sellers / profit takers may be setting orders around the $1890 – $1900 area, which was broken August support  and the weekly R3 Pivot resistance area.

Of course, geopolitical catalysts are an important driver this week, and if the situation worsens in Israel, that could drive more traders to gold than USD in this current environment, especially if bond yields continue to pullback throughout the week.

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