Gold Price Forecast: XAU/EUR bears eye $1,590 50% mean reversion

Gold prices fell on Friday and have extended their losses as the US dollar catches a bid across the board which is weighing on the yellow metal. Against the euro, gold is down by some 1.7% as markets note the divergence between the Federal Reserve and European Central Bank. XAU/EUR trades at $1,608.66 and has travelled within a range of between $1,640.22 and $1,605.78 so far.

The notion that the Fed is on a faster path of tapering and closer to a rate hike than the ECB was underpinned on Friday. Fed officials said the central bank should consider speeding up the reduction in its bond-buying program. Vice Chair Clarida said he’ll be watching data ahead of December’s meeting before discussing whether to make any adjustments.

Fed vs ECB outlook

Meanwhile, the number of states in Germany are increasing that have started to impose social restrictions to combat the rising number of COVID-19 cases. This is leading to an exodus from the single currency. However, it still remains to be seen if the ECB will respond to the renewed COVID-19 restrictions.

It is clear that the central bank's governor,  President Christine Lagarde, still expects inflation to “increase further until the end of the year.” However, she also expressed her concerns of moving too soon. “We must not rush into a premature tightening when faced with passing or supply-driven inflation shocks” she explained when talking to the Frankfurt European Banking Congress. “An undue tightening would represent an unwarranted headwind for the recovery,” she added.

The ECB's next meeting is not until December 16 where President Lagarde will be expected to “focus on the medium term, not on current inflation numbers.” There is a contrast there to that of the Fed.  The dollar set a 16-month high against the euro on Monday after Federal Reserve Chair Jerome Powell was nominated for a second four-year term by President Joe Biden.

The dollar index against a basket of currencies DXY rose 0.40% on the day to 96.468, the highest since July 2020. Traders will now look to when the Fed will release minutes from its Nov. 2-3 meeting on Wednesday, which will be evaluated for any new indications that Fed officials are becoming more concerned about stubbornly high inflation.

Meanwhile, analysts at TD Securities argued that Gold prices are now vulnerable to a deeper consolidation. ''The yellow metal's prices have been buoyed by rising stagflationary winds, which ultimately catalyzed a breakout from a multi-month downtrend from all-time-highs amid a significant wave of CTA short covering and an increase in Chinese appetite for gold,'' they said.

XAU/EUR technical analysis

The price is on the verge of a move to the 50% mean reversion area that has a confluence with the prior resistance at the start of the year near $1,590. However, the M-formation is a reversion pattern, so the price could be expected to move back to the neckline of the pattern near $1,630 first. The 38.5% Fibonacci has already been met, after all, and this price could be subject to an imminent correction. With that being said, the daily candle is strongly bearish, so momentum is with the bears.