Gold Price Analysis: XAU/USD edges lower amid firmer US Dollar, downside seems limited

• Gold price depressed for the second successive day amid modest uptick in US Dollar strength.
• A combination of factors should help limit any meaningful pullback from a multi-month peak.
• Bets for smaller Fed rate hikes could lend support amid the risk of a potential global recession.

Gold price edges lower for the second successive day on Tuesday and moves further away from its highest level since April, around the $1,929 region touched the previous day. The XAU/USD remains depressed heading into the European session, though manages to hold its neck above the $1,900 round-figure mark.

Modest US Dollar strength weighs on Gold price

The US Dollar (USD) is seen building on the overnight bounce from a seven-month low and gaining follow-through traction amid a modest uptick in the US Treasury bond yields. This turns out to be a key factor weighing on the US Dollar-denominated commodities, including Gold. That said, a backdrop for expectations of a less aggressive policy tightening by the Federal Reserve (Fed) act as a headwind for the Greenback.

Bets for smaller rate hikes by Federal Reserve to limit losses

Investors seem convinced that the Fed will soften its hawkish stance in the wake of signs of easing inflationary pressures and the risk of a potential recession. Moreover, several members of the Federal Open Market Committee (FOMC) backed the case for smaller rate hikes and lifted bets for a 25 bps lift-off in February. This, in turn, should continue to lend some support to the non-yielding Gold price.

Recession fears could further lend support to Gold price

Furthermore, a softer risk tone might further contribute to limiting any meaningful downside for the safe-haven XAU/USD, at least for the time being. The market sentiment remains fragile amid worries about headwinds stemming from the worst yet COVID-19 outbreak in China. Adding to this, the protracted Russia-Ukraine war has been fueling concerns about a deeper global economic downturn.

Slightly better Chinese macro data fails to provide impetus

This, to a larger extent, overshadows a better-than-expected Chinese Gross Domestic Product (GDP) print, which showed that the economy grew at an annualized rate of 2.9% in the fourth quarter. Furthermore, improving trends in Chinese Retail Sales and Industrial Production fueled optimism over a recovery in the world's second-largest economy. This, however, fails to boost investors' confidence.

Corrective slide might still be seen as buying opportunity

The aforementioned fundamental backdrop suggests that the path of least resistance for the Gold price is to the upside. Hence, any corrective pullback might be seen as a buying opportunity and is more likely to remain limited. Market participants now look to the release of the Empire State Manufacturing Index from the United States (US) for some impetus later during the early North American session.

Gold price technical outlook

From a technical perspective, Gold is in a medium term uptrend which favours more upside to come. However, the most recent accelerated rally higher during late December and January pierced the upper boundary of its rising channel, suggesting possible exhaustion and the risk of correction at the very least it not reversal. 

There is a risk of a pullback down to the lower channel line at $1,895-1,900 mark which will act as support and decide the next directional move for Gold. The 14-day Relative Strength Index (RSI) is currently exiting overbought, further reinforcing the idea a corrective slide could emerge, and today will be critical in the respect as a fix below the RSI's 70 level will provide a clear technical signal to sell, adding more momentum to the pullback. If it comes to it, a break and close below the channel line at $1,895ish is likely to attract fresh selling a steep move down to an initial target at $1,845, then $1,825. 

Key levels to watch