Gold Price Forecast: XAU/USD climbs back above $1,775 level, limited upside potential

Update: Gold regained positive traction on Wednesday and climbed back above the $1,775 level heading into the European session. The uptick was exclusively sponsored by a broad-based US dollar weakness, which tends to benefit the dollar-denominated commodity. That said, any meaningful upside still seems elusive amid surging US Treasury bond yields and prospects for an early policy tightening by the Fed.

The US bond yields have been rallying since late September when the Fed indicated that it would begin tapering its bond purchases by the end of 2021. Adding to this, the markets have been pricing in the possibility of a potential interest rate hike amid worries that the recent widespread rally in commodity prices will stoke inflation. This, in turn, pushed the yield on the benchmark 10-year US government bond to the highest level since May, which could act as a headwind for the non-yielding gold.

Even from a technical perspective, last week's sharp pullback from the 100/200-day SMAs confluence hurdle, around the key $1,800 mark, favours bearish traders. The emergence of some selling at higher levels on Tuesday added credence to the negative outlook. Hence, any subsequent positive move runs the risk of fizzling out rather quickly amid absent relevant market moving economic releases from the US.

Previous update: Gold (XAU/USD) takes the bids to renew intraday high near $1,775, up 0.30% on a day ahead of Wednesday’s European session. The yellow metal cheers US dollar weakness to extend the early week rebound from 21-DMA.

US Dollar Index (DXY) fades rebound from a three-week low, tested on Tuesday, by easing near 93.70 at the latest. In doing so, the greenback gauge prints a six-day downtrend while ignoring firmer Treasury yields. That being said, the US 10-year Treasury yields step back from the highest since late May while printing 1.8 basis points (bps) of an upside to 1.652% by the press time.

While the Fed tapering chatters seem to support the firmer US Treasury yields, hopes of US stimulus and a lack of major data/events allow the US dollar to consolidate gains around multi-day tops.

Fed Governor Christopher Waller was the latest to support rate hike as saying, per Reuters, “If inflation keeps rising at its current pace in coming months rather than subsiding as expected, Federal Reserve policymakers may need to adopt ‘a more aggressive policy response’ next year.” Additionally, Reuters’ latest poll of economists cites the risk of an earlier rate hike by spotting the reflation fears.

Elsewhere, the International Monetary Fund’s (IMF) China Mission Chief and Assistant Director in the Asia and Pacific Department, Helge Berger highlights risks emanating from the world’s second-largest economy. The diplomat signaled that the Evergrande risk to China is contained for now but the nation is accumulating downside risks. On the same line were the previous day’s comments from IMF citing expectations of an 8.0% 2021 GDP growth from China while also saying, per Reuters, “the economic recovery remains unbalanced.”

Looking forward, inflation headlines, Fedspeak and China-linked fears may entertain gold traders ahead of Friday’s preliminary readings of October month PMIs.

Technical analysis

Gold’s rebound from 21-DMA, as well as a three-week-old support line, gains support from bullish MACD signals while aiming the 200-DMA hurdle surrounding $1,795.

However, the monthly high and the mid-September peak, respectively near $1,801 and $1,808, will challenge XAU/USD bulls afterward. In a case where gold prices manage to cross the $1,808 resistance, the $1,834 horizontal resistance will be in focus.

Meanwhile, pullback moves may target the stated support line and 21-DMA, near $1,771 and $1,760 in that order.

Gold bears may take control on a daily closing below $1,760. Following that, multiple supports near $1,740 and the monthly low close to $1,721 should gain the market’s attention.

Overall, gold prices are in a bullish consolidation mode but multiple resistances will challenge the buyers.

Gold: Daily chart

Trend: Further recovery expected