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Gold Price Forecast: XAU/USD remains at the mercy of US bond yields, US CPI eyed

  • Gold staged a solid bounce from multi-month lows and rallied over 2% on Tuesday.
  • Retreating US bond yields prompted some USD profit-taking and remained supportive.
  • The underlying bullish sentiment kept a lid on any further gains for the safe-haven metal.

Gold witnessed some aggressive short-covering move from nine-month lows and rallied around $40, or over 2% on Tuesday. The strong move up marked the biggest one-day rise since January 4 and was sponsored by a combination of factors – lower bond yields and weaker US dollar. Expectations that the Fed could take some action to curb the rapid rise in long-term borrowing cost led to a modest pullback in the US Treasury bond yields and extended some support to the non-yielding yellow metal. Retreating US bond yields prompted the USD bulls to take some profits off the table, which provided an additional boost to the dollar-denominated commodity.

The XAU/USD finally settled near the top end of its daily trading range, albeit lacked any strong follow-through buying. The underlying bullish sentiment in the financial markets turned out to be a key factor that kept a lid on any further gains for the safe-haven precious metal. The global risk sentiment remained well supported by expectations that successful COVID-19 vaccine rollouts and massive US fiscal spending will lead to a powerful rebound in the economy. The House of Representatives is expected to provide the final approval to a much-awaited $1.9 trillion pandemic relief package proposed by US President Joe Biden.

Meanwhile, some investors see a real risk of an overheated US economy and higher inflation in the back of the planned spending by the Bide Administration. Given that gold is considered as a hedge against inflation, Wednesday's release of the US CPI report will now play a key role in influencing the near-term trajectory. In the meantime, the broader market risk sentiment, the USD price dynamics and the US bond yields will be looked upon for some meaningful trading opportunities.

Short-term technical outlook

From a technical perspective, the overnight recovery might still be categorized as a corrective bounce from oversold conditions and runs the risk of fizzling out rather quickly. Hence, any subsequent positive move might still be seen as a selling opportunity near the $1740 region. This, in turn, should cap the upside for the commodity near the $1760-65 strong horizontal support breakpoint. That said, a sustained move beyond will suggests that the metal has bottomed out and set the stage for some meaningful recovery in the near-term.

On the flip side, the $1700 mark now seems to protect the immediate downside. This is followed by support near the $1685-83 region, which if broken will be seen as a fresh trigger for bearish traders. The XAU/USD might then accelerate the fall towards June 2020 swing lows, around the $1670 level before eventually dropping to the next relevant support near the $1650 area.

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Author

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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