Gold Price Forecast: XAU/USD bears emerge below a key daily countertrendline

The gold price is under pressure by some 0.15%, sliding from a high of $1,783.19 to a low of $1,771.52 on Tuesday as the safe-haven US dollar hit a one-week high after weak global economic data, particularly in China. The data has reignited global recession fears.

Figures for Industrial Production, Retail Sales and fixed asset investments, as released by the National Bureau of Statistics, came in below expectations in July. Additionally, worries about a more pronounced cooling rose from a surprising rate cut by the Chinese central bank, PBoC. The unexpected decision to cut has given the impression that the PBoC is alarmed about the extent of economic weakening as it tries to revive credit demand to support the COVID-hit economy after a string of weak economic data releases for July.  

US Treasury yields rose due to the recession worries with the Federal Reserve expected to continue with steep rate hikes despite nascent signs of a slowdown in inflation. Several Fed policymakers have spoken of the need for continued rate hikes despite the lower-than-expected outcome of last week's Consumer Price Index. "Fed officials have no choice but to sound tough in the face of a very, very tight labour market and far too high inflation," Kit Juckes, the head of FX strategy at Societe Generale argued. "It's hard to build a compelling case to sell the dollar in that world."

''While Chair Powell catalyzed a Fed pivot narrative at the latest FOMC, particularly as the latest print in inflation pointed to cooling pressures, price action in Treasuries supported a rally across all assets,'' analysts at TD Securities said. The yield curve between 2-year and 10-year Treasury notes remained inverted at minus 38.60 basis points on Tuesday. This is viewed as an indicator of an impending recession. The DXY, an index that measures the greenback vs. a basket of currencies reached a peak of 106.94 in early European trading, recovering from the losses that were made on the back of lower-than-expected US inflation data. The index was last seen slightly in the green at 106.52.

Meanwhile, ''odds of a short squeeze in gold are notably declining,'' the analysts at TDS argued. ''However, our CTA positioning estimates suggest that a trend followers buying program contributed to lower rates over the past month, as algos were forced to cover shorts. While this supported higher prices in gold, the bar is razor thin for algorithmic trend followers to add to selling pressures in US10y Treasuries once more,'' the analysts said.

''This should further sap appetite to buy the yellow metal, while the bar for additional short covering rises further. Meanwhile, Shanghai traders are also likely to appear on the offer, particularly amid a weakening CNY. Gold prices are vulnerable, considering we see signs that gold sellers are lurking. Ultimately, prop traders are still holding a massive amount of complacent length, suggesting we have yet to see capitulation in gold, which argues that the pain trade remains to the downside.''

Gold technical analysis

The price of the US dollar is taking on a resistance level that guards a continuation higher on the daily chart above. Below, gold is carving out a bearish case below the counter trendline on the daily chart as follows: