Gold Price Forecast: XAU/USD remains vulnerable to retest monthly lows and slide further

Gold continued with its struggle to register any meaningful recovery from near two-month lows and has been oscillating in a narrow trading band over the past one week or so. The precious metal took a hit earlier this month after the Fed brought forward its timetable for the first post-pandemic interest rate hike. However, subsequent comments from Fed Chair Jerome Powell soothed market nerves over the potential for early moves by the central bank to rein in its very accommodative monetary policies. During his testimony before the House Select Subcommittee on the Coronavirus Crisis, Powell said that inflation is rising due to pent-up demand and supply bottlenecks and that the price pressures should ease on their own.  

The transitory inflation narrative was reaffirmed by Friday's softer core PCE Price Index data, which showed a notable acceleration in May but fell short of market expectations. The Fed’s preferred gauge of inflation shot up to 3.4% in May, marking the largest gain since April 1992. Additional details revealed that consumer spending, which accounts for more than two-thirds of the US economic activity, remained flat following an upwardly revised 0.9% rise in April. This, in turn, extended some support to the non-yielding yellow metal and helped limit the downside, though a combination of factors held bullish traders from placing aggressive bets.

As investors continue to evaluate the Fed's next policy move, the underlying bullish sentiment in the financial markets kept a lid on any meaningful gains for the safe-haven XAU/USD. This, along with a modest US dollar strength acted as a headwind for dollar-denominated commodities, including gold. There isn't any major market-moving economic data due for release from the US, suggesting that the commodity is more likely to extend its subdued range-bound price action on the first day of a new trading week.

Short-term technical outlook

From a technical perspective, the range-bound price action constitutes the formation of a rectangle on short-term charts. Given the recent slump, the rectangle might still be categorized as a bearish consolidation phase and supports prospects for further weakness. The negative bias is reinforced by the lack of any buying interest around the commodity. Hence, a slide back towards retesting monthly swing lows, around the $1,761-60 region, en-route the next major support near the $1,748-47 region, remains a distinct possibility.

On the flip side, the $1,795-$1,800 area now seems to have emerged as immediate strong resistance. A sustained move beyond might trigger a short-covering move towards the $1,815 region. Any further move up might still be seen as a selling opportunity and runs the risk of fizzling out rather quickly near the very important 200-day SMA, currently around the $1,833 region.