• Thursday’s rebound saves the day for gold after a terrible week.

  • Fed’s tapering calls, risk-off mood underpin the dollar, yields take a breather.

  • XAU/USD’s technicals are pointing to further downside potential. 

  • The FX Poll is showing Gold is unlikely to stage a substantial recovery.

Will gold price sustain the comeback from multi-week troughs? The week saw gold witnessing massive volatility, despite limited first-tier US macro news, as Fed sentiment and US political drama led the way. An intensifying global energy crisis, the China Evergrande debt issue and the Fed’s tapering fears kept investors on edge, benefiting the safe-haven US dollar at gold’s expense. However, the quarter-end flows came to the rescue of gold, as the price managed to reverse most of its weekly losses, snapping three straight weekly declines.

Gold: In the hindsight

In the first half of the week, gold price heavily suffered and reached seven-week lows at $1,722, as the previous week’s hawkish shift from the Fed drove the US Treasury yields through the roof while lifting the greenback alongside. Additionally, the several appearances by Fed Chair Jerome Powell and speeches from his colleagues amplified expectations of sooner-than-expected tapering, as the market began pricing in a rate hike in 2022. The hawkish Fed expectations were reflective of the underlying economic optimism.

Further, soaring oil and gas prices ramped up inflation expectations, adding to the Fed’s tapering calls. US inflation expectations, measured by the 10-year breakeven inflation rate per the St. Louis Federal Reserve (FRED) data, climbed to two-week highs near 2.40% on Tuesday. Meanwhile, the benchmark 10-year Treasury yields rose to three-month highs of 1.567%, sending the US dollar index to fresh yearly highs near the mid-94.00s.

By mid-week, the attention gradually started to drift from the Fed’s tapering plans to the escalating tensions over the global energy crisis, in the wake of the persistent rise in the gas and oil prices. The Euro area and the UK experienced empty pumps, which threatened to shut down factories and derail the economic recovery. Similarly, unprecedented power cuts in China have brought the factories to a halt.

Against this background, stagflation worries hit the markets, with the risk-off mood reviving the demand for safe-haven assets such as US government bonds. The Treasury yields, thereafter, corrected sharply from multi-month highs, putting a floor under gold price.

The US political drama, on dual fronts, also started coming into play in the second half of the week, weighing on investor sentiment and helping the buck maintain its bullish momentum. US Senate Majority Leader Chuck Schumer said Thursday that lawmakers agreed to extend government funding through December 3, averting an imminent shutdown. Although, the debt ceiling in mid-October still lurks amid the political wrangling.

Further, a delay in the House vote on US President Joe Biden’s infrastructure bill spooked investors once again, boding well for the dollar. Thursday’s upward revision to the US final Q2 GDP offset the rise in the Jobless Claims, pushing the dollar index to fresh yearly tops, as gold price held onto its rebound amid the worst week for the US stocks since March 2020.

Gold: Week ahead

It is going to be a quiet start to the Nonfarm Payrolls week, with Monday dropping in the US Factory Orders, which is unlikely to have any impact on the Fed’s tapering expectations.

Further, the Chinese markets will remain closed through Thursday, allowing limited volatility during the Asian trades while gold price remains choppy.

Next of relevance for gold traders will be Tuesday’s US ISM Services PMI, with the employment sub-index in focus ahead of Wednesday’s ADP Nonfarm Employment Change. Comments from Atlanta Fed President Raphael Bostic will be closely followed for fresh hints on the Fed’s next policy action.

On Thursday, the US Department of Labor's weekly Initial Jobless Claims report will draw some attention alongside New York Federal Reserve President John William’s speech.

Friday will bring in the all-important US labor market report, with the headline NFP foreseen at 500K in September vs. August’s terrible print of 235K. The NFP data will be closely eyed, as it will indicate ‘clear’ progress of Fed’s maximum employment goal. 

Apart from the economic data, gold price will remain at the mercy of the dynamics in the yields and broader market sentiment. Meanwhile, investors will keep their eyes on the US political scenario and the unfolding global energy crisis.

Gold: Technical Outlook

XAU/USD is trading below a downtrend resistance since mid-September and has dropped below the 50-day, 100-day and 200-day Simple Moving Averages (SMAs). Momentum is to the downside and the Relative Strength Index (RSI) is well above 30 – thus allowing for more falls.

Support awaits at $1,720, which was September's trough, and also cushioned the precious metal back in April. It is followed by August's swing low of $1,690. Close by, $1,680 is of interest. 

Resistance awaits at the early October high of $1,760, followed by $1,785 and $1,810. 

Gold Sentiment

The FX Poll is pointing to drops in the short and medium terms, but a bounce later on. However, despite an upgrade to the projections, they do not foresee a recovery toward the $1,800 level.

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