Gold Price Forecast: Overbought in EUR terms for the first time since July 2016

Gold in EUR terms (XAU/EUR) is looking overbought for the first time since July 2016, according to the 14-week relative strength index (RSI).

As of writing, XAU/EUR is trading at EUR 1,148 - the highest level since June 2017.

An overbought reading on the weekly RSI indicates the rally is overstretched. Indeed, the yellow metal has gained 8.4 percent in a near 90 degree from the lows seen in November. So, a bull breeder or a pullback should not come as a surprise.

The outlook, however, would turn bearish only if the higher lows and higher highs pattern is invalidated.

That could happen if the Fed sounds hawkish today sending the yellow metal sharply lower in dollar terms and the German CPI (due today) and the Eurozone CPI (due tomorrow) beat estimates, dashing hopes of dovish change in ECB's forward guidance. Moreover, the later would ensure that the common currency remains relatively resilient against the greenback.

The US central bank is widely expected to keep rates unchanged. Notably, the Wall Street Journal reported last week that the central bank is planning to end its quantitative tightening program (balance sheet normalization) sooner-than-expected. As a result, expectations are built in the market place that Fed's Powell may confirm the same during the press conference today.

However, the probability of the Fed halting its balance sheet normalization program in the near-term is quite low. Moreover, the Fed has said numerous times in the past that its main tool is interest rates. Powell, therefore, is likely to confirm an end of the rate hike cycle - something, which is already priced in. However, traders looking out for hints of an early end to quantitative tightening are likely to be left disappointed.

Put simply, the odds of a notable pullback in gold are high. Add to that an above-forecast German CPI and gold in EUR terms could suffer a bigger drop.

XAU/EUR weekly chart

As seen above, the 14-week RSI is reporting extreme overbought conditions. Therefore, a correction to ascending 5- and 10-week moving averages (MAs), currently at $1,133 and $1,116, respectively cannot be ruled out before a potential a rally to resistance at $1,170 - trendline connecting July 2016 and April 2016 highs.

A weekly close below the 10-week MA would invalidate the bullish setup.

Daily chart

On the daily chart, the metal is looking north, having confirmed pennant breakout or bullish continuation pattern on Friday. Notably, the RSI here is well short of the highs seen on Jan. 4.

Even so, the bulls need to observe caution, as the weekly RSI is reporting overbought conditions.

That said, the weekly RSI would take a back seat to bullish setup to the bullish daily chart if Fed's Powell counsels patience on balance sheet normalization, although, as discussed above, the probability of Fed halting quantitative tightening in the near-term is quite low.