Gold Price Forecast: XAU/USD struggles near one-week low amid hopes for diplomacy in Ukraine

Update: Gold struggled to capitalize on Friday's bounce from the $1,958 region, or the one-week low and met with a fresh supply on the first day of a new week. Hopes for a diplomatic solution to end the war in Ukraine boosted investors' confidence, which was evident from a generally positive tone around the equity markets. This, in turn, dented demand for traditional safe-haven assets and weighed on the precious metal.

Apart from this, elevated US Treasury bond yields, bolstered by hawkish Fed expectations, was seen as another factor that drove flows away from the non-yielding yellow gold. The recent monster gains in commodity prices have been fueling concerns about a major inflationary shock and reinforced bets for an imminent Fed rate hike move. Hence, the focus now shifts to a two-day FOMC monetary policy meeting starting this Tuesday.

Also read: Gold Price Forecast: Lower lows hinting at a steeper decline

Expectations that the Fed will hike interest rates by 25 bps pushed the benchmark 10-year US government bond above the 2.0% threshold. This, in turn, extended some support to the US dollar, which added to the offered tone surrounding the dollar-denominated gold. Given that the worst of the Ukraine crisis is probably behind us, the fundamental backdrop supports prospects for a further near-term depreciating move for the XAU/USD.

Previous update: Gold (XAU/USD) pauses the early Asian selling around $1,975 ahead of Monday’s European trading session.

The yellow metal’s initial downside could be linked to the brighter progress on the Ukraine-Russia peace talks. However, weekend comments from Moscow and Kyiv do suggest that the policymakers are far from ready to step back. Also weighing on the market sentiment, as well as gold prices, could be the firmer US Treasury yields and pessimism surrounding China’s coronavirus conditions.

It’s worth noting that China is one of the world’s largest gold consumers and the fresh fears of covid, due to the highest daily infections in two years, negatively affects the gold prices. Though, chatters surrounding a halt in the gold production and India’s ramping gold demand, as well as inflation fears, keep the yellow metal on the bull’s radar.

That said, the record-high US inflation expectations, per the 10-year breakeven inflation rate per the St. Louis Federal Reserve (FRED) data, adds strength to the US Treasury yields as market players await this week’s key Fed minutes, which in turn weigh on the gold prices.

Amid these plays, S&P 500 Futures pare early Asian session gains while the US 10-year Treasury yields stay firmer around 2.04%. Further, the US 5-year T-bond yields refresh record top above 2.0%, marking high hopes of the Fed’s 0.50% rate-hike this week.

In addition to the Fed, Ukraine updates and headlines from China will also be important to watch for a clearer XAU/USD prediction.

Technical analysis

A clear downside break of the two-week-old ascending trend line joins bearish MACD signals and descending RSI line to keep gold sellers hopeful.

However, a convergence of the 100-SMA and an upward sloping trend line from February 03, around $1,945 by the press time, appears a tough nut to crack for the XAU/USD bears.

If at all gold sellers conquer $1,945 support, the 200-SMA level of $1844 will act as a last defense of the buyers.

Meanwhile, the support-turned-resistance line near $1,992 precedes the $2,000 psychological magnet to challenge the short-term recovery of XAU/USD prices.

Following that, multiple hurdles around $2,035 and $2,060 may test the bold bulls ahead of directing them to the $2,070-75 area comprising the latest high and the year 2020 top.

Overall, gold is likely to witness a pullback towards short-term support convergence but the XAU/USD bulls aren’t yet out of the woods.

Gold: Four-hour chart

Trend: Further weakness expected