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Gold Price Forecast: Will overbought conditions trigger a XAU/USD correction?

  • Gold price hangs close to record highs of $2,664 early Wednesday.   
  • The US Dollar licks wounds with Treasury bond yields as China MLF cut boosts sentiment.   
  • Gold price enters extremely overbought conditions on the daily chart, risks a long-due correction.

Gold price is consolidating near the highest level on record at $2,664 early Wednesday, struggling for a fresh upside boost amid a risk-on market profile and extremely overbought conditions on the daily chart.

Gold price extends winning streak, but for how long?

Risk sentiment receives a fresh boost in Asian trading on Wednesday after the People’s Bank of China (PBOC) cut the one-year Medium-term Lending Facility (MLF) rate from 2.30% to 2.0% on Thursday, in a bid to shore up the dwindling economy. The MLF rate reduction is one such measure among a host of other stimulus efforts rolled out by China lately.

Gold price appears to lack a bullish conviction, at the moment, as China stimulus optimism weighs on the traditional safe-haven on one side while on the other hand, it raises hopes of a potential increase in Chinese demand, as the dragon nation is the world’s top Gold consumer.

However, Gold price draws support from rallying global equities and growing expectations that the US Federal Reserve (Fed) will opt for a 50 basis points (bps) interest rate cut in November, which continue to undermine the US Dollar (USD) and the US Treasury bond yields.

On Tuesday, the USD was dumped across the board alongside the US Treasury bond yields on China’s stimulus-driven risk flows and weak US Conference Board (CB) Consumer Confidence and regional activity data. Soft data stoked another outsized Fed rate cut expectations at the upcoming meeting.

The CB Consumer Confidence Index dropped to 98.7 this month from an upwardly revised 105.6 in August, registering the largest decline since August 2021. Meanwhile, The Richmond Fed index fell to a 52-month low of -21 from a prior low of -19 in August and a low before that of -17 in July.

Markets are currently pricing in about a 60% chance of such a move, the CME Group’s Fed WatchTool shows. For the next two Fed meetings, rate futures are implying more than 80 bps in cuts. Additionally, the US Dollar also bore the brunt of the sell-off in US Treasury bond yields across the curve, triggered by a strong auction of US two-year government bonds.  

Looking ahead, there is no top-tier US economic data in the docket. However, speeches from Fed policymakers and risk trends will continue to play a pivotal role in the Gold price action. Further, Gold traders could also resort to repositioning ahead of a bunch of Fedspeak due Thursday, including the key opening remarks from Fed Chair Jerome Powell at the US Treasury Market Conference in New York.  

Gold price technical analysis: Daily chart

As observed on the daily chart, the extremely overbought conditions, as represented by the 14-day Relative Strength Index (RSI) flriting with the 80 level, suggest that a correction could be in the offing.  

If buyers flex their muscles, acceptance above the $2,670 round level is critical to unleashing further upside toward the $2,700 barrier.

On the flip side, any correction in Gold price will likely test the previous day’s low of $2,623, below which the $2,600 threshold will come into play.

Further south, Gold sellers could target the September 20 low of $2,585.

Economic Indicator

Fed's Chair Powell speech

Jerome H. Powell took office as a member of the Board of Governors of the Federal Reserve System on May 25, 2012, to fill an unexpired term. On November 2, 2017, President Donald Trump nominated Powell to serve as the next Chairman of the Federal Reserve. Powell assumed office as Chair on February 5, 2018.

Read more.

Next release: Thu Sep 26, 2024 13:20

Frequency: Irregular

Consensus: -

Previous: -

Source: Federal Reserve

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Author

Dhwani Mehta

Dhwani Mehta

FXStreet

Residing in Mumbai (India), Dhwani is a Senior Analyst and Manager of the Asian session at FXStreet. She has over 10 years of experience in analyzing and covering the global financial markets, with specialization in Forex and commodities markets.

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