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Robust U.S. economic activity to support dollar, weigh on gold prices next week

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(Kitco News) - Robust economic activity will continue to support the U.S. dollar's vice-like grip on the gold market and keep prices trapped in their current trading range, according to some analysts.

December gold futures are caught between resistance around $1,980 an ounce and support at $1,920. Heading into the weekend, the precious metal last traded at $1,943.30 an ounce, down 1% from last Friday.

Economic data next week is expected to support growing expectations that the Federal Reserve will keep interest rates unchanged later this month and potentially push the central bank to a more neutral stance for the rest of the year.

However, U.S. economic data could be placed on the backburn as the focus shifts to Europe ahead of the European Central Bank's monetary policy decision. There is a growing expectation that the ECB will leave interest rates unchanged, not because inflation is under control but because the threat of a recession continues to grow.

Andrew Kenningham, chief European economist at Capital Economics, said that while the ECB could raise interest rates next week, he suspects the impact will be limited because it could be the central bank's last in this tightening cycle.

"We think another 25bp rate hike is the most likely outcome but would not be surprised if policymakers left rates on hold," Kenningham said. "And either way, President Lagarde will stress that interest rates will remain high for a long while. That would be consistent with our view that the first rate cut will not take place until September next year."

Analysts have said that Europe's slowing economy makes the U.S. dollar more attractive to investors.

"There is more capital moving into the U.S. dollar as the U.S. economy remains fairly resilient," said Darin Newsom, senior market strategist at "The U.S. dollar has all the bullish momentum and that is a statement on the overall health of the economy."

In this environment, Newsom said that he sees gold prices stuck in a short-term downtrend. He added that there is room for gold prices to fall back to the August lows.

Edward Moya, senior market analyst at OANDA, said he also sees further support for the U.S. dollar in the near term, limiting gold's rally.

The gold market could hit $2,600 as U.S. dollar index falls below 104 - DeCarley Trading's Carley Garner

"The U.S. dollar remains well positioned to move higher and that is going to make it difficult for gold," he said. "Gold will have its day in the sun, but it won't be next week."

After a relatively slow week, the economic calendar picks up with the release of the U.S. Consumer Price Index, Producer Price Index and retail sales.

According to some economists, next week's inflation and consumption data could set the tone for the Federal Reserve's fast-approaching monetary policy meeting. Some analysts have noted that weak economic growth will force the Federal Reserve to end its tightening cycle even as inflation remains well above its 2% level.

Some analysts have also suggested that rising gasoline prices will create upward pressure on headline inflation.

According to the CME FedWatch Tool, markets see a more than 90% chance that the Federal Reserve will leave interest rates unchanged after its Sept. 24 monetary policy meeting. At the same time, markets still see a 50/50 chance of no move in November.

Colin Cieszynski, chief market strategist at SIA Wealth Management, said he sees potential for gold to test the top of its range next week as inflation remains stubborn.  However, he added that he doesn't see any major breakouts in the precious metal in the near term.

"I'm not convinced we are ready to break this trading range, but we've tested the lows and are probably due for a bounce," he said. "Although I see gold potentially higher next week, it remains stuck in a broad range and that is not going to change anytime soon. Even if the data supports the idea that the Federal Reserve is done raising interest rates, it won't be lowering them anytime soon."

Cieszynski said that while he sees long-term bullish potential for gold, he doesn't see prices breaking out until the Fed signals that it is ready to lower interest rates.

"It could be at least another six months before that happens and I think until then, gold will remain stuck," he said.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.