On Wednesday, as the US dollar extended this week’s rebound from last week’s long-term lows against a basket of other major currencies, gold prices continued to pull back within the sharp uptrend that has been in place for the past two months. US inflation data on Wednesday morning, in the form of the Producer Price Index, helped give a further boost to the dollar, resulting in continued pressure on dollar-denominated gold. Although the PPI reading for August fell short of expectations at a 0.2% rise against a prior consensus forecast of 0.3%, the increase represented a significant rebound from July’s -0.1% decline in producer prices. Looking ahead to Thursday, the US Consumer Price Index for August will be released, with a consensus forecast of +0.3% (and core CPI, excluding food and energy, expected at +0.2%), following July’s lower-than-expected +0.1% rise.

As the US dollar has rebounded strongly from its lows for the first half of this week, the question remains as to how much further the greenback may correct its previously oversold conditions before resuming its well-entrenched downtrend against other major currencies. As long as serious doubts remain over the trajectory of Federal Reserve rate hikes, in contrast with other major central banks that are seen as leaning increasingly towards monetary policy tightening, the US dollar could continue to be pressured and gold could be further boosted.

As it stands, the gold pullback this week that has been driven both by the dollar rebound and lower safe-haven demand as risk aversion has declined and equity markets rallied, is currently still a relatively minor pullback within the strong bullish trend from early July. Late last week, the price of gold reached just above the key $1350 resistance level, a high not seen since August of last year. This week, price has pulled back less than 3% from that high thus far. If gold stays supported above the critical $1300 support level, a rebound and subsequent resumption of the bullish trend is likely, particularly if pressure on the dollar driven by the Fed or economic data resumes and/or market risk aversion returns. On a short-term basis, the clearest upside target on such a rebound remains at the key $1350 resistance level, with any further rise targeting $1375-area resistance.

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