Gold Price Forecast: XAU/USD clings to $1,850 after biggest daily fall in two weeks

Update: Gold (XAU/USD) treads water around $1,850 amid Wednesday’s Asian session. The yellow metal marked heavy volatility the previous day as it initially refreshed a five-month high before posting the heaviest daily fall since November 3.

That said, the early Tuesday’s run-up could be linked to the Fedspeak trying to tame the reflation fears and the start of the virtual meeting between US President Joe Biden and his Chinese counterpart Xi Jinping.

However, strong US Retail Sales, Industrial Production and housing market data joined hawkish comments from St. Louis Fed President James Bullard, ex-US Treasury Secretary and former New York Fed President, Lawrence Summers and Bill Dudley respectively, to weigh on the gold price.

On the contrary, San Francisco Federal Reserve Bank President Mary Daly’s attempts to placate bond bears seem to offer the latest pause in the downtrend.

It’s worth noting that the Fedspeak will be the key for gold traders to watch going forward amid a light calendar day.

End of update.

The price of gold sank by over 0.6% on Tuesday and printed a low of $1,849.77, following a big move in the US dollar. XAU/USD fell from a high of $1,877.14 after the greenback rallied to the highest levels since June 2020, reaching as high as 95.899. 

The US dollar rallied to a fresh 16-month high as US yields took off on the back of impressive data and hawkish Federal Reserve speakers. US data showed US consumers looked past rising prices and drove Retail Sales higher than expected last month. US Retail Sales rose 1.7% in October, topping consensus expectations of a 1.4% rise.

The US dollar has been better bid ever since US inflation data last week surprised to the upside and showed consumer prices surged to their highest rate since 1990. Investors expects that the Federal Reserve will taper their QE programme at a faster pace. More hawkishly, some observers even expect that the Fed could potentially hike interest rates sooner than first anticipated.

Fed speakers spur on the USD bulls

Also spurring up-the US dollar bulls was the well-known hawk, St. Louis Federal Reserve bank president James Bullard. "If inflation happens to go away we are in great shape for that. If inflation doesn't go away as quickly as many are currently anticipating it is going to be up to the (Federal Open Market Committee) to keep inflation under control," Bullard said on Bloomberg Television.

"The inflation rate is quite high," Bullard said. "It behooves the committee to tack in a more hawkish direction in the next couple of meetings so that we are managing the risk of inflation appropriately."

He also said that the Fed could also play up the idea that it does not have to wait to end the taper in order to raise rates.

This follows previous comments from Bill Dudley – former New York Fed President – who said: “they’re going to have to get the taper done quicker”. The Fed has already said it could change the pace of tapering if warranted and thus far the inflation data supports the need to slow stimulus. 

US stocks cheer positive data

Meanwhile, US stocks were boosted by the strong Retail Sales data, also alongside strong manufacturing and home-build data. However, US equity markets took little notice of comments from Federal Reserve members that monetary stimulus should be curbed more quickly to combat inflation. The S&P 500 lifted 0.6% into the close on Wall Street. 

Overall, it was a setback for the price of gold despite the prospects of higher inflation and lower real US yields. Analysts at TD Securities' have forecasted slowing growth and inflation next year and that to them suggests that market pricing remains far too hawkish. However, they note that gold prices have managed to break out nonetheless as global markets scour for inflation hedges. This leaves a bullish bias on the fundamental side, but there could be a meanwhile correction left to play out still as follows:

Gold technical analysis

As per the prior analysis, Gold Price Forecast: Bulls could be throwing in the towel here, the price is correcting from a weekly resistance that was illustrated as follows:

The following is an update with the price action and market structure drawn on the daily chart in confluence with the above prior analysis:

The bears could be on the verge of a test of prior resistance structure in the $1,830s.