Gold Weekly Forecast: XAU/USD turns bullish on falling bond yields, technical breakout

• Gold has fluctuated in a wide range throughout the week.
• Falling US Treasury bond yields supported XAU/USD in face of broad USD strength.
• Investors will keep a close eye on yields amid a lack of high-tier data releases.

Gold struggled to find direction in the first half of the week but came under strong bearish pressure late Wednesday with the initial market reaction to the US Federal Reserve’s policy announcements. The sharp decline witnessed in the benchmark 10-year US Treasury bond yield, however, allowed XAU/USD to stage a decisive rebound toward $1,800 on Thursday. Although the dollar ended the week decisively higher against other major currencies, gold didn't have a difficult time clinging to its gains in the second half of the week.

What happened last week

The data from the US revealed on Monday that the ISM Manufacturing PMI edged lower to 60.8 in October from 61.1 in September. The Prices Paid component of the ISM’s survey jumped to 85.7 from 81.2, confirming that input price pressures remained elevated. Nonetheless, XAU/USD stayed in a consolidation phase with investors moving to the sidelines ahead of the Fed’s policy decisions.

As expected, the Fed left its benchmark interest rate, the target range for federal funds, unchanged at 0%-0.25% and unveiled that it will start reducing asset purchases by $15 billion per month starting mid-November. 

During the press conference, FOMC Chairman Jerome Powell reiterated that they will not automatically hike the policy rate once the quantitative easing program concludes. The chairman further emphasized that they see higher inflation persisting and said that they will be ready to address that risk. While responding to questions from the press, Powell explained that the liftoff test was clearly not met on the employment goal and noted they want to see further improvement in the labour market before they consider a rate hike.

Although the immediate market reaction caused the greenback to weaken modestly against its major rivals, XAU/USD turned south with 10-year US T-bond yield shooting higher. 

On Thursday, the dollar regathered its strength and registered impressive gains against European currencies but gold managed to gain traction amid falling T-bond yields. As it currently stands, the positive correlation between the dollar’s market valuation and yields seems to have weakened. More importantly, yields are having a more significant impact on XAU/USD than the dollar’s relative performance against other major currencies.

Meanwhile, the Bank of England’s decision to leave its policy rate unchanged at 0.1% was another factor that weighed on global yields on Thursday. 

On Friday, the US Bureau of Labor Statistics reported that Nonfarm Payrolls rose by 531,000 in October, surpassing analysts' estimate of 425,000. The dollar preserved its bullish bias after this data but gold stayed resilient with the 10-year yield breaking below 1.5% on Friday. 

Next week

There won’t be any high-tier macroeconomic data releases at the start of the week and investors will keep a close eye on US T-bond yields. Currently, the 10-year yield is below 1.5% and unless it manages to rebound above that level, XAU/USD could continue to push higher. On the other hand, gold could lose interest in case the 10-year yield reclaims 1.6% and steadies above that level.

On Wednesday, the US Bureau of Labor Statistics will release the October Consumer Price Index (CPI) data. The Core CPI, which excludes volatile food and energy prices, is expected to remain unchanged at 4% on a yearly basis. Since the Fed uses the Personal Consumption Expenditures (PCE) Price Index as its preferred gauge of inflation, the market reaction to the CPI data could remain limited.

On Thursday, the UK’s Office for National Statistics will publish the third-quarter Gross Domestic Product (GDP) data. Following the BoE’s latest policy decisions, the CME Group BoEWatch Tool shows there is a 67.5% chance of a 15 basis points rate hike in December. In case the GDP report shows a significant slowdown in the UK’s economic activity, the odds of a December hike could decline and weigh on global yields.

The University of Michigan’s preliminary November Consumer Sentiment Index will be featured in the US economic docket on Friday.

Gold technical outlook

Gold closed above the 200-day and the 100-day SMAs for the second straight day on Friday. Additionally, the Relative Strength Index (RSI) indicator on the daily chart rose above 50, confirming the bullish shift in the near-term outlook. 

On the upside, XAU/USD could target $1,810 (static level) ahead of $1,820 (Fibonacci 38.2% retracement of the April-June uptrend). A daily close above the latter could open the door for additional gains toward $1,835 (static level).

First support now aligns at $1,790 (200-day SMA) before $1,785 (100-day SMA) and $1,770 (Fibonacci 61.8% retracement).

Gold sentiment poll

The FXStreet Forecast Poll shows that half of the experts see gold rising next week but the average target stands at $1,798. The monthly outlook paints a mixed outlook.