Gold Price Forecast: XAU/USD seems vulnerable to test sub-$1,600 levels

• Gold drops to its lowest level since April 2020 as the relentless USD buying remains unabated.
• The prospects for more aggressive Fed rate hikes, elevated US bond yields underpin the buck.
• Recession fears weigh investors’ sentiment and limit losses for the safe-haven XAU/USD.

Gold kicks off the new week on a weaker note and drops to its lowest level since April 2020 during the Asian session. Buying the US dollar and selling everything else remains a key theme in the markets, which is a key factor weighing the dollar-denominated commodity. Last week, the Fed delivered another supersized rate hike, as was widely anticipated, and signalled significant increases at its upcoming meetings. A more hawkish stance adopted by the US central bank remains supportive of elevated US Treasury bond yields. The rate-sensitive 2-year US government bond yield hits a 15-year high, and the benchmark 10-year Treasury note stands near its highest in 11 years. This continues to underpin the greenback and further drives flows away from the non-yielding yellow metal.

The intraday downfall, however, stalls near the $1,626 region amid the prevalent risk-off environment, which tends to benefit the safe-haven gold. The market sentiment remains fragile amid growing recession fears. Investors remain worried that a faster policy tightening by major central banks will lead to a deeper global economic downturn. This, along with the risk of a further escalation in the Russia-Ukraine conflict, helps limit losses for the XAU/USD. Russian President Vladimir Putin announced the first public mobilisation since World War II to shore up its faltering Ukraine war in the latest geopolitical development. Apart from this, headwinds stemming from China's zero-covid policy take a toll on the risk sentiment. The anti-risk flow is evident from a generally weaker tone around the equity markets.

Any meaningful recovery, meanwhile, still seems elusive, warranting some caution before confirming that the XAU/USD has formed a near-term bottom. In the absence of any major market-moving economic releases from the US, traders on Monday will take cues from speeches by influential FOMC members - Boston Fed President Susan Collins, Atlanta Fed President Raphael Bostic and Dallas Fed President Lorie Logan. This, along with the US bond yields, will influence the USD price dynamics and provide some impetus to gold. Furthermore, the broader risk sentiment might produce short-term trading opportunities around the XAU/USD.

Technical Outlook

From a technical perspective, Friday’s downfall confirmed a breakdown through a one-week-old consolidative trading range. This might have already set the stage for additional losses, suggesting that any meaningful recovery move still be seen as a selling opportunity. Hence, a subsequent fall towards the next relevant support, around the $1,600-$1,590 region, now seems a distinct possibility.

On the flip side, the trading range support breakpoint, around the $1.656 area, now seems to act as an immediate hurdle. Sustained strength might trigger a short-covering move, though it risks fizzling out rather quickly near the $1,675-$1.676 supply zone. Some follow-through buying, however, will negate the near-term negative bias and pave the way for additional gains, allowing bulls to aim back to reclaim the $1.700 round-figure mark.