Gold Weekly Forecast: XAU/USD's gains to remain limited on demand-side dynamics

• Gold prices declined amid a worsening demand outlook this week.
• Fed's rate outlook and balance sheet reduction plan to impact dollar valuation.
• XAU/USD faces the next significant resistance at $1,930.

Gold started the new week under heavy bearish pressure and lost nearly 2% on Monday. Following a meagre recovery attempt on Tuesday, XAU/USD failed to hold above $1,900 and touched its weakest level in more than two months at $1,872 on Tuesday but erased a large portion of its losses to close the week above $1,900.

What happened last week?

As Shanghai’s coronavirus lockdown dragged into the fourth week, China ordered mass coronavirus testing in Beijing on Monday, escalating fears over a lockdown in the capital city of the world’s second-biggest economy. In turn, XAU/USD dropped below $1,900 for the first time in nearly a month.

“After a strong start to Q1 in China, demand came to a virtual halt in March,” the World Council noted in a recently published research. “Tough new lockdowns imposed to contain a resurgence of COVID-19 had a marked impact on demand for jewellery, bars and coins,” the publication further read, suggesting that the gold price is likely to struggle to gain traction as long as China sticks to its zero-COVID policy.

Meanwhile, the greenback capitalized on safe-haven flows and put additional weight on XAU/USD’s shoulders. On top of China-related concerns, the protracted Russia-Ukraine conflict caused investors to grow increasingly worried about a global economic slowdown. 

Although gold managed to stage a modest rebound amid a more-than-3% decline witnessed in the benchmark 10-year US Treasury bond yield on Tuesday, the relentless dollar-buying made it difficult for XAU/USD to gather bullish momentum. Meanwhile, Russia's Foreign Minister Sergei Lavrov said that they rejected Ukraine's proposal to hold peace talks in Ukraine and warned that they must not underestimate the risks of a nuclear conflict, boosting the dollar even further. 

The unabated dollar rally continued on Wednesday and gold ended up losing more than 1%. On Thursday, data from the US showed that the economy contracted at an annualized rate of 1.4% in the first quarter of the year following the impressive 6.9% expansion recorded in the fourth quarter of 2021. The initial market reaction to the disappointing growth data forced the dollar to lose some interest and gold closed the day in positive territory.

With the dollar selloff picking up steam ahead of the weekend, gold extended its rebound beyond $1,900. The US Bureau of Economic Analysis announced on Friday that the Personal Consumption Expenditures (PCE) Price Index climbed to 6.6% on a yearly basis in March from 6.3% in February. On an encouraging note, the Core PCE Price Index, the Fed’s preferred gauge of inflation, edged lower to 5.2% from 5.3%. 

Next week

The ISM will release the US Manufacturing PMI on Monday. Markets expect the report to show that the business activity in the manufacturing sector continued to expand at a robust pace in April. A weaker-than-expected PMI reading is likely to force the greenback to stay under bearish pressure and help XAU/USD push higher. In case the headline PMI surprises to the upside, the dollar might have a tough time capitalizing on it ahead of Wednesday’s all-important FOMC meeting. 

The Fed is widely expected to hike its policy rate by 50 basis points and unveil its plan to shrink the balance sheet. The most likely scenario for the Fed is to trim its holdings of US Treasury bonds and mortgage-backed securities by $60 billion and $35 billion, respectively, per month from June, bringing the total reduction to $95 billion. 

It’s worth noting that markets have already priced in these actions. A QE reduction of less than $95 billion could be seen as a slight dovish tilt in the Fed’s policy outlook and trigger a voluminous dollar selloff. Such an action is likely to cause US Treasury bond yields to fall sharply and provide a boost to XAU/USD. 

The Fed’s forward guidance on the rate outlook will also be scrutinized intensely by investors. According to the CME Group FedWatch Tool, markets are pricing a 94.5% probability of a total of 125 basis points (bps) rate hikes in the next two meetings. In case either the policy statement or FOMC Chairman Jerome Powell outright dismisses the possibility of 75 bps rate hikes in 2022, the dollar will have more room for a downward correction.

On the other hand, any mention of a 75 bps rate hike being on the table in the near future would be assessed as a confirmation of the Fed’s willingness to tighten the policy in an aggressive way and not allow gold to hold its ground.

On Friday, the US Bureau of Labor Statistics will release the April jobs report. Nonfarm Payrolls (NFP) are expected to rise by 400,000 following March’s increase of 431,000. Fed policymakers made it abundantly clear that they are not concerned about the labor market and the FOMC’s policy outlook is likely to remain the primary driver of the dollar’s market valuation.

In the meantime, gold’s gains are likely to remain limited regardless of the dollar’s performance in case Beijing goes into a lockdown.

Gold technical outlook

The Relative Strength Index (RSI) indicator on the daily chart is rising toward 50, pointing to a loss of bearish momentum. On the upside, $1,930 (Fibonacci 50% retracement of the February-March uptrend) aligns as key resistance and gold might stay in a consolidation phase between that level and $1,900 (psychological level, Fibonacci 61.8% retracement) ahead of the Fed's policy announcement.

Above $1,930, the next hurdle aligns at $1,940 (20-day SMA, 50-day SMA) ahead of $1,960 (Fibonacci 38.2% retracement). 

In case the pair makes a daily close below $1,900, the next bearish targets align at $1,880 (100-day SMA) and $1,870 (former resistance, static level).

Gold sentiment poll

Half of the polled experts see gold rising in the short term. The average target of $1,918 on the one-week view, however, suggests that the yellow metal's gains are likely to remain as technical corrections. The one-quarter outlook remains extremely bullish with the average target sitting above $2,000.