Gold Weekly Forecast: XAU/USD needs a dovish Fed to ditch bears

• Gold registered losses despite a positive start to the week.
• A dovish Fed surprise could weigh on US yields and help XAU/USD gain traction.
• The near-term technical outlook reveals a lack of buyer interest.

The broad-based selling pressure surrounding the dollar in the first half of the week helped gold reach a fresh multi-week high of $1,675 on Wednesday. With upbeat macroeconomic data releases from the US helping the greenback regather its strength, however, XAU/USD reversed its direction and ended up closing the week in negative territory below $1,650. As investors get ready for the Fed's highly-anticipated policy announcements, the technical picture suggests that sellers look to continue to dominate the yellow metal's action.

What happened last week?

Following the Wall Street Journal article that claimed the US Federal Reserve was planning to have a discussion on whether and how to signal plans for a smaller rate hike in December, the dollar struggled to find demand on Monday. Additionally, the data published by S&P Global showed late Monday that the business activity in the private sector continued to contract at an accelerating pace in early October with the Composite PMI dropping to 47.3 from 49.5 in September. In turn, XAU/USD managed to hold its ground.

The US Federal Housing Finance Agency reported on Tuesday that house prices fell at a stronger rate than anticipated in August, not allowing the greenback to regain its traction and helping gold keep its footing. Moreover, the Conference Board's Consumer Confidence Index declined to 102.5 in October from 107.8 in September, missing the market expectation of 105.9. As the dollar sell-off picked up steam amid falling US Treasury bond yields on Wednesday, the yellow metal stretched higher and advanced to its highest level in two weeks at $1,675. In the absence of high-impact macroeconomic data releases from the US, the Bank of Canada’s dovish 50 basis points (bps) rate hike caused global yields to push lower.

On Thursday, the European Central Bank announced that it raised its key rates by 75 bps as expected. During the press conference, ECB President Christine Lagarde refrained from committing to one more over-sized rate hike in December and didn’t share any details on a possible quantitative tightening move, causing the shared currency to come under heavy selling pressure. The greenback captured some of the capital outflows out of the euro and made it difficult for XAU/USD to preserve its bullish momentum. Additionally, the US Bureau of Economic Analysis’ (BEA) first estimate revealed that the US economy expanded at an annual pace of 2.6% in the third quarter, compared to the market consensus of 2.4%.

With the benchmark 10-year US Treasury bond yield rising above 4% on the upbeat Gross Domestic Product (GDP) data, gold came under renewed bearish pressure and turned negative on the week below $1,650. 

The BEA announced on Friday that inflation in the US, as measured by the Personal Consumption Expenditures (PCE) Price Index, stayed unchanged at 6.2% on a yearly basis in September. The Core PCE Price Index, the Fed’s preferred gauge of inflation, edged higher to 5.1% from 4.9% in August, coming in higher than analysts' estimate of 5.2%. Despite the relatively soft inflation data, US T-bond yields pushed higher and forced the precious metal to stay under bearish pressure. 

Next week

The ISM will release the October Manufacturing PMI report on Tuesday. The market reaction to S&P Global’s PMI surveys suggests that a disappointing print is likely to weigh on the greenback. Ahead of the Federal Reserve’s policy announcements on Wednesday, however, the impact of this report on the dollar’s market valuation should remain short-lived.

The Fed is widely expected to raise its policy rate by 75 bps to the range of 3.75%-4% following its November policy meeting. Although FOMC policymakers said numerous times that they will base their policy decisions on incoming data and will not be providing any forward guidance, investors will look for hints of a smaller hike in December, as the WSJ article suggested. Currently, the CME Group’s FedWatch Tool shows that markets are pricing in a 51.5% probability of the Fed hiking its policy rate by a total of 125 bps by end-2022. The market positioning demonstrates that the dollar has more room on the downside in case investors are convinced that the Fed will opt for a 50 bps hike in December. In that scenario, XAU/USD is likely to gather bullish momentum alongside falling US yields. Furthermore, a risk rally could be triggered with markets starting to price in a peak Fed hawkishness, putting additional weight on the USD.

On the other hand, risk traders are likely to be disappointed in case the US central bank shows no intentions of a policy pivot and seek refuge in the dollar. That would likely be a significant bearish development for gold and open the door for an extended decline.

On Thursday, the ISM Services PMI will be featured in the US economic docket but market participants should pay little to no attention in the aftermath of the Fed’s policy decisions.

Finally, the US Bureau of Labor Statistics will publish the October jobs report on Friday. Investors forecast Nonfarm Payrolls (NFP) to rise by 200,000 following September’s better-than-expected increase of 263,000. The market reaction to the past few NFP releases had been straightforward with strong prints helping the dollar outperform its rivals and vice versa. A similar response could be witnessed ahead of the weekend.

Gold technical outlook

Gold failed to make a daily close above the 20-day SMA despite having tested that level twice earlier in the week. Additionally, the Relative Strength Index (RSI) indicator on the daily chart turned south and declined toward 40 after meeting resistance at around 50, suggesting that sellers look to retain control of gold’s action.

On the downside, $1,620 (the end-point of the six-month-old downtrend) aligns as critical support. A drop below that level could trigger a technical selloff and cause XAU/USD to slide toward $1,600 and $1,575 (static level from April 2020).

If XAU/USD makes a daily close above $1,670 (20-day SMA) and manages to stabilize, it could target $1,680 (50-day SMA), $1,700 (psychological level) and $1,720 (100-period SMA, Fibonacci 23.6% retracement).

Gold sentiment poll

The FXStreet Forecast Poll points to a bullish outlook in the near term with the average one-week target sitting at $1,660. The one-month view paints a mixed picture with half of the polled experts adopting a bullish view against 40% bearish.