Gold Price Forecast: Bullish flag pattern in the making for XAU/USD

Gold edged lower on Thursday and slipped to three-day lows, albeit lacked any strong follow-through selling. The US dollar shot to over nine-month tops in reaction to Wednesday's FOMC meeting minutes, which indicated that the Fed is on track to roll back its pandemic-era stimulus later this year. Policymakers thought that the benchmark of substantial further progress criterion has been met in terms of inflation and maximum employment. Investors now seem convinced that the US central bank is comfortable to start reducing the pace of its bond purchases, provided that the economic recovery remains within expectations. This, in turn, provided a goodish lift to the greenback and undermined the dollar-denominated commodity.

The USD maintained its strong bid tone after data released from the US showed that Initial Weekly Jobless Claims dropped to a 17-month low of 348K during the week ended August 14. This, to a larger, extent, offset the disappointing release of the Philly Fed Manufacturing Index, which fell to 19.4 in August from 21.9 in the previous month. Separately, the Conference Board's Leading Index jumped 0.9% in July and suggested that the economy is set to continue to expand at a rapid pace in the fall. The board expects the US economy to grow 6% for the full year, though the Delta variant and rising inflation could act as a headwind in the months ahead. Nevertheless, the data remained supportive of the intraday USD positive move.

Meanwhile, the prospects of the Fed cutting back its massive stimulus spooked investors. Apart from this, concerns about the spread of the highly transmissible Delta variant of the coronavirus took its toll on the global risk sentiment. This, in turn, extended some support to traditional safe-haven assets, rather assisted the precious metal to regain some positive traction during the Asian session on Friday. In the absence of any major market-moving economic releases from the US, the focus now shifts to the Jackson Hole Symposium scheduled for 26 to 28 August. In the meantime, the XAU/USD is more likely to remain confined in a broader trading range held since the beginning of this week.

Short-term technical outlook

From a technical perspective, the recent price action constitutes the formation of a downward sloping channel on the 1-hour chart. Against the backdrop of a strong rebound from multi-month lows, the mentioned channel could be categorized as a bullish continuation flag pattern. However, technical indicators on the daily chart – though have recovered from the negative territory – are yet to confirm a bullish bias. This makes it prudent to wait for a sustained break through the channel resistance before positioning for any further appreciating move.

A subsequent strength beyond the weekly tops, around the $1,795 region, and the $1,800 mark will reaffirm the bullish bias. The commodity might then surpass an intermediate hurdle near the $1,812-13 region, or the very important 200-day SMA, and aim to challenge the double-top resistance, around the $1,832-34 zone.

On the flip side, the overnight swing low, around the $1,775 region now seems to protect the immediate downside ahead of the trend-channel support near the $1,770 area. This is closely followed by 200-hour SMA, around the $1,760 area, which if broken decisively will shift the bias in favour of bearish traders. The next relevant support is pegged near the $1,751 horizontal zone. The downward momentum could further get extended towards the $1,718-17 region before the metal eventually drops back to challenge the $1,700 round-figure mark.