Gold Price Forecast: XAU/USD struggles below $1,770 level, focus remains on FOMC decision

Update: Gold remained on the defensive heading into the European session and was last seen trading around the $1,769-68 region, just above a one-and-half-week low touched in the previous day. The US Producer Price Index released on Tuesday reinforced hawkish Fed expectations and continued acting as a headwind for the non-yielding yellow metal. That said, a softer tone surrounding the US dollar extended some support to the dollar-denominated commodity. Apart from this, renewed concerns about the economic fallout from the spread of the new Omicron variant of the coronavirus helped limit deeper losses for the safe-haven XAU/USD.

Investors also seemed reluctant to place any aggressive bets, rather preferred to move on the sidelines ahead of the highly anticipated FOMC policy decision, due later during the US session. Given that the markets have been pricing in the possibility for an eventual lift-off by June 2022, investors will look for fresh clues about the Fed's strategy on interest rates. This will play a key role in determining the next leg of a directional move for gold prices. In the meantime, traders might take cues from the release of the US monthly Retail Sales figures to grab some short-term opportunities around the precious metal.

Previous update: Gold (XAU/USD) stays steady at around $1,772, keeping the bounce off four-month-old support during early Wednesday.

The bullion prices dropped in the last two days amid escalating fears of the South Africa covid variant, dubbed as Omicron, as well as hawkish hope from the US Federal Reserve (Fed). However, vaccine news challenges the virus woes while a sustained fall in the US inflation expectations and a jump in the coronavirus infections may stop the Fed hawks during today’s Federal Open Market Committee (FOMC).

Australia’s most populous state New South Wales will have 25k new covid cases daily, per a model shared by ABC News, whereas the UK is likely to witness further Omicron-linked hospitalizations and a lack of rapid testing kits. Elsewhere, China and Europe seem struggling with the COVID-19 variant but Japan tries to be optimistic. Furthermore, Pfizer report 70% efficacy of its vaccine’s three shots versus Omicron hospitalization and 33% safety against infection. The drugmaker also reported that its experimental COVID-19 pill, Paxlovid, is effective to tame all covid variants, including Omicron.

On the other hand, a drop in the US inflation expectations, as measured by the 10-year breakeven inflation rate per the St. Louis Federal Reserve (FRED) data, to 11-week low contrast with a record high Producer Price Index (PPI) for November to test Fed hawks. “We expect the monthly pace to be doubled to $30bn from $15bn, consistent with QE ending in mid-March instead of mid-June. Officials will likely also convey a more hawkish tone through changes to the statement, the economic projections, and the dot plot. We expect the median dot to show a 50bp increase in the fund's rate in 2022,” said TD Securities.

Elsewhere, geopolitical and trade tensions between the US and China, as well as America-Iran, also weigh on the market sentiment but gain a little response pre-Fed.

Amid these plays, the US Treasury yields and the S&P 500 Futures remain sluggish while portraying the pre-Fed market sentiment. On the same line is a mixed performance by the Asia-Pacific stocks.

Looking forward, the gold prices are likely to remain vulnerable as Fed is up for a big battle with inflation. However, Omicron stays ready to throw a wild card.

Technical analysis

After multiple pullbacks from 200-DMA and a fortnight-long sideways performance, gold bears flex muscles while bounding off an upward sloping support line from August, around $1,770.

Given the downside MACD signals and RSI conditions, sellers are likely keeping the controls should the quote mark a decisive break of the $1,770 support.

Following that, 61.8% Fibonacci retracement of August-November upside near $1,760 and the $1,738 may act as a buffer before directing the quote towards September’s low near $1,721.

Meanwhile, an upside clearance of the 200-DMA level surrounding $1,793-94 won’t be an open invitation to the gold buyer as multiple levels from October 22 will test the upside momentum near $1,814-15.

Even if the gold prices cross the $1,815 resistance, tops marked in July and September around $1,834 will precede the $1,850 level to test the advances targeting November’s peak of $1,877.

Gold: Daily chart

Trend: Further weakness expected