Gold Price Forecast: XAU/USD corrects from two-month tops, downside seems limited

Gold witnessed a modest intraday pullback from two-month tops touched earlier this Monday and dropped to the $1,813-12 region during the early part of the European session. This marked the first day of a negative move in the previous three sessions and was sponsored by a goodish rebound in US Treasury bond yields, which tend to drive flows away from the non-yielding yellow metal.

The Fed last week stuck to its transitory inflation narrative and indicated that policymakers were in no rush to hike borrowing costs. Investors, however, seem convinced that the US central bank would be forced to adopt a more aggressive policy response to contain stubbornly high inflation. This, in turn, triggered a fresh leg up in the US bond yields and acted as a tailwind for the US dollar, which was seen as another factor that weighed on the dollar-denominated gold.

Meanwhile, the cautious mood around the global equity markets provided support to the safe-haven precious metal and helped limit any deeper losses, at least for now. Nevertheless, gold, seems to have snapped a two day winning streak and remains at the mercy of the US bond yields. In the absence of any major market-moving economic releases from the US, traders will take cues from Fed Chair Jerome Powell's remarks later during the US session.

The focus, however, will remain on the latest US consumer inflation figures, due on Wednesday. The CPI print will play a key role in influencing market expectations about the likely timing of the Fed's policy tightening, which, in turn, should help determine the next leg of a directional move for gold.

Technical outlook

From a technical perspective, last week's sustained break through the $1,800 mark and acceptance above the $1,1810 level favours bullish traders. Hence, some follow-through strength towards testing a strong barrier, around the $1,832-34 heavy supply zone, remains a distinct possibility. That said, weakness below the $1,800 mark might prompt some long-unwinding and drag gold back towards the $1,780 level en-route to the $1,770 support zone.

Levels to watch