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Gold Price Forecast: New COVID-19 variant boosts XAU/USD, hawkish Fed to cap gains

  • Gold ended slightly higher on Wednesday and snapped four days of the losing streak.
  • Hawkish Fed expectations acted as a headwind and capped the upside for the metal.
  • Renewed COVID-19 jitters provided a goodish lift during the Asian session on Friday.

Gold edged higher on Wednesday and snapped four successive days of the losing streak to the lowest level since November 4, though lacked any follow-through buying. The US dollar consolidated its recent strong gains to a 16-month peak and turned out to be a key factor that extended some support to the dollar-denominated commodity. That said, expectations for an early policy tightening by the Fed acted as a tailwind for the buck and capped the upside for the non-yielding yellow metal.

Investors seem convinced that the Fed would be forced to raise interest rates sooner rather than later to contain stubbornly high inflation. The bets were reinforced by Wednesday's release of the US PCE Price Index, which accelerated to a 30-year high in October. Adding to this, the minutes of the November FOMC meeting revealed that policymakers were open to speeding up the tapering of the bond-buying program and moving quickly to raise interest rates if high inflation persists.

Nevertheless, gold prices ended slightly higher and regained positive traction during the Asian session on Friday amid fresh COVID-19 jitters. The detection of a new and possibly vaccine-resistant coronavirus variant triggered a fresh wave of the global risk-aversion trade. This was evident from a sharp drop in the equity markets, which forced investors to take refuge in traditional safe-haven assets. This, in turn, pushed the precious metal back closer to the $1,800 round-figure mark.

The global flight to safety was reinforced by a steep decline in the US Treasury bond yields, which kept the USD bulls on the defensive. This was seen as another factor that allowed the commodity to move further away from a near three-week low touched on Wednesday. In the absence of any major market-moving economic releases from the US, the focus will remain on developments surrounding the coronavirus saga. Apart from this, the US bond yields and the USD price dynamics will play a key role in influencing gold's intraday momentum on the last day of the week.

Technical outlook

From a technical perspective, the recent retracement slide from the $1,877 region, or the highest level since June 2021 stalled near support marked by an upward sloping trend-line. The mentioned support, currently around the $1,783-82 zone, would now act as a key pivotal point for short-term traders. A convincing break below will be seen as a fresh trigger for bearish traders and pave the way for additional losses. The XAU/USD could then accelerate the fall towards the $1,770-69 area en-route the monthly swing low, near the $1,759 region.

On the flip side, momentum above the $1,800 mark is likely to confront resistance near the $1,807-08 region. Some follow-through buying could trigger a short-covering move and push gold prices beyond an intermediate hurdle near the $1,718-0 area, towards testing a static resistance near the $1,832-34 supply zone. A convincing breakthrough the latter will suggest that the corrective fall has run its course and lift the XAU/USD to the next relevant barrier near the $1,850 region.

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Haresh Menghani

Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.

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