• Gold staged a sharp U-turn after dropping toward $1,750 earlier in the week.
  • Risk aversion amid heightened inflation fears is boosting the yellow metal.
  • Next target on the upside for XAU/USD is located at $1,835.

Gold fluctuated in a relatively tight channel during the first half of the week but slumped to its weakest level in two months at $1,753 late Wednesday. The precious metal, however, managed to stage a decisive rebound and broke above $1,800 on Friday, snapping a four-week losing streak.

What happened last week

After moving sideways and closing little changed on Monday, XAU/USD came under bearish pressure on Tuesday. The data from the US revealed that producer prices increased at their strongest pace in more than a decade with the Producer Price Index (PPI) soaring to 9.6% on a yearly basis in November. Investors started to price in a hawkish Federal Reserve policy outlook and gold fell toward the lower limit of its two-week-old range near $1,770.

On Wednesday, the Fed announced that it will double the pace of asset taper to $30 billion per month from mid-January. More importantly, the updated Summary of Economic Projections, the so-called 'dot plot', showed that policymakers' median forecast pointed to three rate hikes in 2022. The hawkishness of the Fed's policy statement caused gold to slump to its weakest level since early October at $1,753.

During the press conference, FOMC Chairman Jerome Powell noted that it would not be appropriate to hike the policy rate before the taper was completed and the market pricing of a rate hike as early as March remained unchanged. Additionally, the 10-year US Treasury bond yield failed to climb above 1.5% and allowed XAU/USD to reverse its direction.

On Thursday, the Bank of England (BOE) hiked its policy rate by 15 basis points and said that inflation could reach 6% by April of 2022. The European Central Bank (ECB) announced that it will end the Pandemic Emergency Purchase Programme (PEPP) in March. To offset the impact of policy tightening on markets, the ECB decided to ramp up its purchases under the Asset Purchase Programme (APP) to €40 billion in the second quarter from €20 billion where it currently stands. Moving forward, the bank plans to decrease purchases to €30 billion in the third quarter and €20 billion in the second quarter. Regarding the inflation outlook, ECB revised the 2022 HICP forecast to 3.2% from 1.7% in its September projections. 

In addition to inflation fears, reports suggesting that the coronavirus Omicron variant is much more contagious than the Delta variant weighed heavily on market sentiment in the second half of the week. The UK reported more than 80,000 confirmed cases on Thursday and vaccine producers' initial findings showed that Omicron was much more resilient against two shots than the previous variants. Reflecting the risk-averse market environment, global equity indexes suffered heavy losses and gold continued to gather strength heading into the weekend.

Next week

The risk perception will continue to impact financial markets at the start of the next week in the absence of high-tier macroeconomic data releases. Gold is likely to find demand as a traditional safe haven if investors remain concerned over the potential negative impact of the Omicron variant on activity and inflation outlook.

On Wednesday, the US Bureau of Economic Analysis will release its final estimate of the third-quarter Gross Domestic Product (GDP). Investors expect the annualized GDP growth to be left unchanged at 2.1% and the market reaction is likely to be muted.

On Thursday, the Personal Consumption Expenditures (PCE) Price Index, the Fed's preferred gauge of inflation, will be looked upon for fresh impetus. On a yearly basis, the Core PCE Price Index, which excludes volatile food and energy prices, is expected to rise to 4.5% from 4.1% in November. Ahead of the Christmas break, market participants could ignore this inflation report since they already know what the Fed's plan to control price pressures look like. 

In short, the market sentiment and technical signs should impact gold's valuation heading into 2022.

Gold Technical Analysis

On Thursday, XAU/USD closed above the 200-day SMA for the first time since late November and climbed to a new December high of $1,814 on Friday. The 38.2% Fibonacci retracement level of the latest uptrend seems to have formed resistance near that level. In case the pair rises above it and confirms it as new support, it could target $1,835 (Fibonacci 23.6% retracement).

On the downside, $1,800 (psychological level, Fibonacci 50% retracement, 50-day SMA, 200-day SMA) aligns as significant support. As long as this level holds, buyers are likely to remain in control of gold's action. In the meantime, the Relative Strength Index (RSI) indicator on the daily chart is holding above 50, confirming the view that the bullish momentum is building up.

Below $1,800, $1,790 (100-day SMA) could be seen as next support below $1,780 (Fibonacci 61.8% retracement).

Gold sentiment poll

The FXStreet Poll also points to a bullish shift in the near term but suggests that gains could remain limited. The average targets for the one-week and one-month views align at $1,818 and $1,822, respectively.

Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.

If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.

FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.

The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.

Feed news Join Telegram

Recommended Content

Recommended Content

Editors’ Picks

EUR/USD rises above 0.9700 amid persistent dollar weakness

EUR/USD rises above 0.9700 amid persistent dollar weakness

EUR/USD has gathered bullish momentum and advanced to a fresh daily high above 0.9700 in the American session on Wednesday. The renewed selling pressure surrounding the greenback amid improving market mood seems to be fueling the pair's rebound.


GBP/USD extends recovery beyond 1.0850 in volatile session

GBP/USD extends recovery beyond 1.0850 in volatile session

Following an initial spike to 1.0850 on BoE's intervention in gilt markets, GBP/USD lost nearly 300 pips. With the dollar losing its strength after Wall Street's opening bell, however, the pair reaches fresh daily highs above the level. 


Gold: Sharp bounce falling short of indicating a trend change

Gold: Sharp bounce falling short of indicating a trend change

XAUUSD bounced from a fresh two-year low of $1,614.81 a troy ounce as dip buyers appeared on the dollar’s extreme overbought conditions. The bright metal peaked at $1,661.57, its highest for the week, holding above the $1,650 mid-US afternoon.

Gold News

Cardano price ignored the Vasil hard fork, but here is a promising bullish pattern

Cardano price ignored the Vasil hard fork, but here is a promising bullish pattern

ADA has a lot to prove to investors amid questions over frequent declines despite increased development activities. The smart contracts token is trading slightly below its price level before the Vasil hard fork.

Read more

Invesco Nasdaq Trust (QQQ) ETF hopes for pivot but faces Apple headwinds

Invesco Nasdaq Trust (QQQ) ETF hopes for pivot but faces Apple headwinds

Stocks remain challenged this morning by competing news as overall volatility levels remain close to recent highs. A brief attempt at a rally on Tuesday failed miserably, and now the market opens negatively after having attempted to move higher during the premarket.

Read more