Gold Price Forecast: XAU/USD set for more pain if the $2,021 support fails

  • Gold price is testing critical daily support ahead of Wednesday's US Retail Sales data.
  • Middle East geopolitical escalation and easing Fed cut bets support the US Dollar.
  • Gold price witnessed a symmetrical triangle fakeout, as tables turned against buyers. 

Gold price is licking its wounds at around $2,025 in Wednesday’s Asian trading, having incurred heavy losses on Tuesday, courtesy of the unabated demand for the US Dollar (USD) amid a further escalation in the Middle East geopolitical tensions and easing bets for aggressive US Federal Reserve (Fed) rate cuts this year.

Gold price eyes US Retail Sales for repricing of Fed expectations

The US Dollar found solid demand on Tuesday, surging to its highest level in more than five weeks against its major rivals near 103.40 after risk sentiment took a big hit on reports that Iran’s Islamic Revolutionary Guard Corps (IRGC) fired missiles at targets near the US Consulate in Erbil, Iraq. Also, Iran-backed Houthi rebels struck a US-owned cargo vessel with an anti-ship ballistic missile off the coast of Yemen.

Additionally, investors pared back bets for aggressive Fed rate cuts this year, following Fed Governor Christopher Waller’s less dovish speech, offering extra legs to the US Dollar comeback. Waller walked back on his previous view on the dovish policy pivot, as he noted on Tuesday that while inflation was approaching the central bank's 2.0% target, the Fed should not rush to cut interest rates until lower inflation can clearly be sustained.

In Wednesday’s trading so far, risk-aversion continues to dominate the market sentiment, keeping the US Dollar underpinned near multi-week highs. Therefore, Gold price remains vulnerable as persistent geopolitical tensions in the Red Sea are likely to keep investors on edge, supporting the US Dollar’s safe-haven status.

In the latest developments, the US military carried out new strikes in Yemen late Tuesday against anti-ship ballistic missiles in a Houthi-controlled part of the country after a missile struck a Greek-owned vessel in the Red Sea.

Looking ahead, the US Retail Sales data due later at 13:30 GMT will be closely eyed for fresh hints on the timing and pace of the Fed rate cuts. Markets are now pricing in a 65% probability of a rate cut by the Fed in March, according to the CME Group’s FedWatch tool, compared with the 81% likelihood at the start of the week.

The US Retail Sales are seen rising 0.4% MoM in December, compared with a 0.3% increase reported in November. Retail Volume, ex-Autos, is set to rise 0.2% in the same period. A weak US Retail Sales report is likely to point to easing inflationary pressures, in turn, reverberating aggressive Fed rate cut expectations.

Gold price technical analysis: Daily chart

As observed on the daily chart, Gold price portrayed a symmetrical triangle fakeout on Tuesday and in fact confirmed a downside break from the triangle after closing the day below the rising trendline support, then at $2,031.

Gold sellers barged in after the 21-day Simple Moving Average (SMA) at $2,046 failed to hold the fort.

Gold price is challenging the critical 50-day SMA support at $2,021, at the time of writing. Failure to defend the latter on a sustained basis could fuel a fresh sell-off toward the $2,000 mark.

Ahead of that, the $2,010 round level could offer some temporary support to Gold buyers.

The 14-day Relative Strength Index (RSI) indicator has flipped bearish, as it falls further below the midline.

Any recovery in Gold price would need acceptance above the triangle support now turned resistance at $2,033. The next strong upside barrier is seen at $2,046, the confluence of the 21-day SMA and the triangle resistance.

Fresh buying opportunities will generate above the latter, allowing Gold price to retest the $2,050 psychological level.

(This story was corrected on January 17 at 19:14 GMT to say that Gold price is testing critical daily support ahead of Wednesday's US Retail Sales data, not Thursday's)

Gold FAQs

Why do people invest in Gold?

Gold has played a key role in human’s history as it has been widely used as a store of value and medium of exchange. Currently, apart from its shine and usage for jewelry, the precious metal is widely seen as a safe-haven asset, meaning that it is considered a good investment during turbulent times. Gold is also widely seen as a hedge against inflation and against depreciating currencies as it doesn’t rely on any specific issuer or government.

Who buys the most Gold?

Central banks are the biggest Gold holders. In their aim to support their currencies in turbulent times, central banks tend to diversify their reserves and buy Gold to improve the perceived strength of the economy and the currency. High Gold reserves can be a source of trust for a country’s solvency. Central banks added 1,136 tonnes of Gold worth around $70 billion to their reserves in 2022, according to data from the World Gold Council. This is the highest yearly purchase since records began. Central banks from emerging economies such as China, India and Turkey are quickly increasing their Gold reserves.

How is Gold correlated with other assets?

Gold has an inverse correlation with the US Dollar and US Treasuries, which are both major reserve and safe-haven assets. When the Dollar depreciates, Gold tends to rise, enabling investors and central banks to diversify their assets in turbulent times. Gold is also inversely correlated with risk assets. A rally in the stock market tends to weaken Gold price, while sell-offs in riskier markets tend to favor the precious metal.

What does the price of Gold depend on?

The price can move due to a wide range of factors. Geopolitical instability or fears of a deep recession can quickly make Gold price escalate due to its safe-haven status. As a yield-less asset, Gold tends to rise with lower interest rates, while higher cost of money usually weighs down on the yellow metal. Still, most moves depend on how the US Dollar (USD) behaves as the asset is priced in dollars (XAU/USD). A strong Dollar tends to keep the price of Gold controlled, whereas a weaker Dollar is likely to push Gold prices up.

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