XAU/USD Weekly Forecast: USD strength hinting at a test of $1,500

• Political turmoil in the United Kingdom fueled demand for the USD.
• China, the United States and Germany will publish their Gross Domestic Product next week.
• XAU/USD is at risk of extending its slump once $1,610 gives up

Spot gold fell for a second consecutive week and neared a two-year low of $1614.81 a troy ounce on Friday, as demand for the American Dollar resumed mid-week amid a risk-averse environment. Financial markets were led by sentiment amid a scarce macroeconomic calendar, with political turmoil in the United Kingdom adding a bit of spice to an overall quiet week.

UK noise spurs risk aversion

Following 44 days in office, UK Prime Minister Liz Truss announced her resignation on Thursday. The 1922 Committee quickly announced another leadership contest to be conducted next week. The political crisis resulted from Truss´s failed mini-budget, including tax cuts and a fiscal black hole worth roughly £60 billion. The Chancellor of the Exchequer, Jeremy Hunt, tried to save Truss’s head by reverting some of the measures, but the UK government imploded anyway.

Furthermore, the UK Consumer Price Index soared by 10.1% YoY in September, with the core annual figure up by 6.5%. Higher inflation levels have been behind the market’s turmoil as the EU and Canada also released their CPIs, showing that central banks’ quantitative tightening is doing little to bring prices down.

Global growth at risk

Global inflation remains at multi-year highs, and policymakers’ determination to control it lifts the risks of a worldwide recession. Additionally, China has stepped up its restrictive measures against the coronavirus, sticking to its zero-covid policy. Chinese measures to keep the pandemic under control have proved disruptive for the global economy earlier in the year, as the Shanghai lockdown exacerbated bottlenecks and supply-chain issues, partially responsible for soaring prices.

Given China is gold’s biggest importer, the state of its economy matters to the yellow metal, and in the coming week,  the market’s focus will be on delayed Chinese data. Next Wednesday, China will publish the Q3 Gross Domestic Product, which is expected to have increased by 3.5% after falling by 2.6% in the previous three months. The country will also publish September Retail Sales, Industrial Production and the Trade Balance. Healthy readings could provide a temporal boost to the market sentiment but will be mostly taken with a pinch of salt.

The US will keep speculators busy on Thursday, as the country will release its Q3 Gross Domestic Product data. The economy is expected to have grown by 2% in the three months to September, reverting the negative trend that saw growth contracting for two consecutive quarters. September Durable Goods Orders will be out at the same time. Both could impact Fed expectations and the US dollar, which in turn will affect gold prices.

XAU/USD technical outlook

XAU/USD weekly chart shows that the risk remains skewed to the downside. The bright metal spent the last few days below a critical Fibonacci resistance level at $1,658.50, the 61.8% retracement of the $1,614.81/$1,729.54 rally. At the same time, the metal keeps developing far below all of its moving averages, with the 20 SMA heading firmly south far above the current level. Technical indicators, in the meantime, remain within negative levels, with the RSI stable near oversold readings and the Momentum grinding north below its midline.

The daily chart shows that, despite the latest recovery, the XAU/USD pair has room to extend its slump to fresh 2022 lows. The 20 SMA has partially lost its bearish strength and consolidates at around $1,665, but the longer moving averages keep heading firmly lower, far above the current level. The Momentum indicator has extended its decline below its midline, maintaining its downward slope, while the RSI has bounced modestly from its weekly low, currently at around 40.

Large stops are suspected just below $1,610, the immediate support area. Below the latter, Gold can extend its slide to $1,565.02, March 2020 high. The next support is the $1,500 threshold. A steady advance beyond the aforementioned resistance could result in a bullish corrective advance toward $1,671.90, the 50% retracement of the mentioned rally.

XAU/USD sentiment poll

The FXStreet Forecast Poll shows that market players are waiting for XAU/USD to remain under pressure in the weeks to come. For the weekly perspective, 80% of the polled experts are betting for levels below the current one, with an average target of $1,619 a troy ounce. Bears stand at 72% in the monthly perspective while decreasing to 50% in the quarterly view.

Moving averages in the Overview chart offer sharp bearish slopes, in line with a downward extension, with the bright metal seen around $1,600 in the near term but below it in the next few weeks. The quarterly perspective shows a wide spread of potential targets, hinting at a potential recovery by year-end.