Gold Price Forecast: XAU/USD remains at the mercy of US bond yields/USD price dynamics

  • A combination of factors assisted gold to stage a modest recovery from multi-month lows on Tuesday.
  • Retreating US bond yields undermined the USD and provided a goodish lift to the non-yielding metal.
  • The optimistic global economic outlook capped any further gains for the commodity, at least for now.

Gold staged a goodish rebound from eight-month lows touched earlier on Tuesday and finally settled with modest gains for the first time in six sessions. Given that the recent violent selloff in the US bond market has eased, slightly oversold conditions on short-term charts turned out to be one of the key factors that prompted some short-covering around the non-yielding yellow metal.

The US Treasury bond yields have been a key focal point in recent weeks amid the prospects for a faster US economic recovery from the pandemic. The upbeat US economic outlook was supported by the impressive pace of COVID-19 vaccinations and the progress on the US President Joe Biden's proposed $1.9 trillion relief package. The reflation trade forced investors to price in a possible uptick in inflation and raised doubts that the Fed would retain ultra-low interest rates for a longer period.

Meanwhile, retreating US bond yields led to a sharp US dollar pullback from a nearly one-month high, which provided an additional boost to the dollar-denominated commodity. Apart from this, a softer tone surrounding the US equity markets further benefitted the safe-haven XAU/USD and contributed to the overnight positive move. The attempted recovery, however, lacked any follow-through amid optimism that a massive US fiscal spending plan will energise the global economic recovery.

Investors also seemed reluctant to place any aggressive directional bets, rather preferred to wait on the sidelines ahead of the upcoming key event/data risk. The Fed Chair Jerome Powell is scheduled to speak about the US economy at an online event hosted by the Wall Street Journal on Thursday. This, along with the release of the closely watched US monthly jobs report (NFP) on Friday, would assist investors to determine the next leg of a directional move for the commodity.

In the meantime, Wednesday's US economic docket – featuring the releases of the ADP report on private-sector employment and ISM Services PMI – will be looked upon for some impetus later during the early North American session. Traders might further take cues from the broader market risk sentiment; the US bond yields and the US price dynamics in order to grab some meaningful opportunities.

Short-term technical outlook

From a technical perspective, nothing seems to have changed much for the metal and the near-term bias still seems tilted in favour of bearish traders. The overnight move up might still be categorized as a corrective bounce from oversold conditions, which runs the risk of fizzling out rather quickly. Hence, any further recovery might be seen as a selling opportunity and remain capped near the $1960-65 region. That said, a sustained strength beyond will negate the bearish outlook and trigger a fresh wave of the short-covering move. The commodity might then aim back to reclaim the $1800 mark before eventually darting towards the 200-day EMA strong barrier near the $1815-16 supply zone.

On the flip side, the $1725-23 region now seems to protect the immediate downside and is followed by support near the overnight swing lows, around the $1707 area. Failure to defend the mentioned support levels might turn the commodity vulnerable to break below the $1700 mark and accelerate the downfall towards the $1675-70 congestion zone. This should act as a strong base, which if broken decisively should pave the way for an extension of a near seven-month-old downtrend.


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