Gold Price Forecast: XAU/USD bulls pressured, but eye a retest and breakout above $1,730

The gold price is down on the day after falling heavily from a high of $1,728.23 to a low of $1,704.00. The yellow metal is trading around $1,709.33 at the time of writing and lowing some 0.5%. The US dollar index and shorter-dated US Treasury yields rose on Thursday following Federal Reserve Chair Jerome Powell's comments that the central bank was "strongly committed" to controlling inflation.

The DXY index, which measures the greenback vs. a basket of currencies has travelled between a low of 109.334 and a high of 110.243 so far while the 10-year Treasury yield has recovered to a 3.304% high on the day from a low of 3.201%. The two-year yield reached a high of 3.506% from a low of 3.404% and is currently up 1.45% on the day. 

Meanwhile, US stocks have struggled for direction as investors digested hawkish remarks by Powell and other policymakers that are underpinning the sentiment for a large interest rate hike later this month. In more recent trade, Chicago Fed President Charles Evans joined his fellow policymakers in saying that reining in inflation is "job one," although he said that he would prefer to raise rates and hold for some time, rather than raise too far and then have to cut. ''I'm open-minded on 50 bps or 75 bps rate hike for Sept.'' Money market traders see nearly 90% odds that the Fed will hikes rates by 75 basis points at this month's meeting. 

''Over the last multiple decades, gold prices have tended to outperform in the earlier stages of a hiking cycle, but have displayed a systematic underperformance when markets expect the real level of the Fed funds rate to rise above the neutral rate,'' analysts at TD Securities explained. ''In turn,'' they added, ''while gold prices may now have accurately captured the expected level of interest rates, they are not reflecting the implications of a sustained period of restrictive policy.''

This leaves the focus on the downside for gold, as the analysts have been arguing and suggesting to ''fade the technical rebound in gold prices.'' 

''While gold prices are flirting with a break of a multi-decade uptrend near $1675/oz, the stars are aligning for additional downside in precious metals to ensue. Rates markets appear to be nearing a fair pricing for Fed funds, but gold's price action is still not consistent with its historical performance when hiking cycles enter into a restrictive rates regime.''

''At the same time, the margin of safety against a short squeeze continues to grow, increasing odds that we can break through this critical support.''

Meanwhile, adding insult to injury, US data showed the number of Americans filing new claims for unemployment benefits fell last week to a three-month low. This proves a robust labout market even in the face of higher levels of interest rates. In this regard, investors will be waiting for a critical last-minute US August inflation report next week ahead of the Fed meeting that will offer some final key information that could give fresh clues on whether the Fed will need to raise by 75 or 50 basis points at the next policy meeting due Sept. 20-21.

Gold technical analysis

From a 4-hour chart perspective, the harmonic pattern is playing out with the price correcting higher from the C-D lows. However, as the chart below ill show, the bulls are making hard work of it:

The price has stalled ahead of a 38.2% Fibonacci retracement level on two levels of rise. The third attempt could be more successful and a break of 1,730 might be significant. The M-formation is a reversion pattern, so the next attempt could be imminent.