Gold Price Forecast: XAU/USD bulls are testing critical resistance, traders eye key events

The Gold price is making progress on the day into the final push on Wall Street and rallied from a low of $1,917.22 to a high of $1,942 on the day so far.

Gold price rose to the highest in nine months as the US Dollar and bond yields came under pressure following the start of the week's 1% drop in leading economic indicators in December which solidified the dovish sentiment surrounding the Federal Reserve, Fed, that is now expected to announce another interest-rate hike when its policy committee meets next week.

The US Dollar was weakening, making the metal more affordable for international buyers while the Fed officials are out on the blackout week ahead of the highly anticipated Fed interest rate decision. the Gold price flourished with investors now awaiting US economic data due this week that could impact the Federal Reserve's policy path. 

Federal Reserve is eyed, sentiment mixed

Investors are banking on the Federal Reserve raising rates by 25 basis points (bps) at the January 31 - February 1 policy meeting, after slowing its pace to 50 bps in December, following four straight 75-bp hikes. Meanwhile, the Gold price tends to benefit due to lower interest rates that otherwise decrease the opportunity cost of holding the non-yielding asset. 

The most hawkish of comments came from St. Louis Federal Reserve's President James Bullard who said US interest rates have to rise further to ensure that inflationary pressures recede.

''We’re almost into a zone that we could call restrictive - we’re not quite there yet,” Bullard said Wednesday in an online Wall Street Journal interview. Officials want to ensure inflation will come down on a steady path to the 2% target. “We don’t want to waver on that,” he said.

“Policy has to stay on the tighter side during 2023” as the disinflationary process unfolds, Bullard added.

Bullard has pencilled in a forecast for a rate range of 5.25% to 5.5% by the end of this year.

However, economic reports, such as Producer Price Index and Retail Sales have recently shown disinflationary tendencies, reinforcing expectations that the Fed will continue to reduce its tightening pace in upcoming meetings.

With that being said, analysts at ANZ Bank recently wrote a note, entitled, ''Fed tightening not done yet.''

''So far in early 2023, US data releases have indicated a mild easing in inflationary pressures and softer demand. This indicates the Fed’s aggressive tightening last year is starting to take effect,'' the analysts explained. ''Weakness in housing is evident (existing home sales fell 17.8% last year), manufacturing activity has faltered and Retail Sales are returning to trend.''

Meanwhile, analysts at Brown Brothers Harriman have also of the opinion that the market is underestimating the potential for a higher for longer Federal Reserve. ''Core Personal Consumption Expenditures, PCE, has largely been in a 4.5-5.5% range since November 2021,'' they said. ''We think the Fed needs to see further improvement before even contemplating any sort of pivot.''

EUR/USD and Europen Central Bank sentiment in the mix

Meanwhile, the Euro has been a little cheerier of late, also pressuring the US dollar and helping to support risk appetite and a bid into the Gold price. European Central policymaker, Peter Kazimir, said on Monday that inflation easing was good news but added that it was not a reason to slow the pace of interest rate hikes, as reported by Reuters.

Governing Council member and Governor of Austria's central bank Olli Rehn made some comments on the European Central Banks' interest rates policy during their appearances over the weekend also as did  ECB governing council member Klaas Knot on Sunday, advocating steep rate hikes. "Expect us to raise rates by 0.5% in February and March and expect us to not be done by then and that more steps will follow in May and June," Knot said.

Analysts at TD Securities argued that the gold price could struggle to firm further in the absence of the single-largest buyer of gold over the past months. On the downside, a break below the $1,900/oz range is required to spark trend-follower liquidations.

Gold technical analysis

The Gold price is on track for a crash should the US dollar bust to life given the placement of the price in the market structure. The US Dollar has been testing the daily trendline resistance as follows:

If this were to break then the Gold price will likely be headed lower, but there is red news scheduled for Thursday so any moves prior to that might be limited and a distribution schematic and higher highs could be more likely in the lead up:

Bullish trendline for Gold price is vulnerable.

A break of Gold price structures is eyed for the days ahead so long as resistance holds. 

A sell-off and capitulation of the Gold price bulls could lead to a significant run towards $1,900.