Gold Price Forecast: XAU/USD rebounds amid a sharp USD pullback, upside potential seems limited

Gold reverses an early European session dip to the $1,655 area and climbs to a fresh daily high in the last hour, though lacks follow-through buying. The XAU/USD is currently placed around the $1,670 region and remains confined in a familiar trading range held over the past week or so.

The US dollar witnessed a dramatic turnaround from a fresh 20-year peak touched earlier this Thursday and turns out to be a key factor lending some support to the dollar-denominated gold. The sharp USD downfall is mainly driven by a massive rally in the Japanese yen that followed news that the Japanese government has intervened in the forex market. That said, a more hawkish stance adopted by the Federal Reserve could act as a tailwind for the greenback.

As was widely expected, the Fed raised interest rates by another 75 bps on Wednesday and signalled more large rate increases at its upcoming policy meetings. The Fed's so-called dot plot revealed that policymakers expect the benchmark lending rate to top 4% by the end of 2022 and further hikes in 2023, with rate cuts beginning only in 2024. This remains supportive of elevated US Treasury bond yields and caps the upside for the non-yielding gold.

Apart from this, a modest recovery in the risk sentiment - as depicted by a generally positive tone around the equity markets - might further contribute to keeping a lid on the safe-haven precious metal. From a technical perspective, the one-week-old trading range constitutes the formation of a rectangle. Given the recent decline, this might still be categorized as a bearish consolidation phase and supports prospects for a further near-term fall.

The fundamental, as well as the technical backdrop, suggests that the path of least resistance for gold is to the downside. Hence, any meaningful recovery attempt could be seen as a selling opportunity and runs the risk of fizzling out rather quickly. Market participants now look forward to the US Weekly Initial Jobless Claims. This, along with the US bond yields and the broader risk sentiment, might provide some impetus to the commodity.

Technical levels to watch