Gold Price Forecast: XAU/USD bulls move in on further US dollar weakness

Update: Gold, (XAU/USD) is on the verge of a break higher as it moves in on the daily highs and back above Thursday's close. The yellow metal is up some 0.18% at the time of writing as the US dollar moves lower on the session by some 0.17%.

The greenback cannot seem to sustain a correction and that is playing into the hands of the gold bulls. At a low of 94.681, the DXY index is 2 pips away from a fresh breakout low following the sell-off this week in the index. Should the index penetrate 94.50, then 94 te figure will be next in line and this would be expected to give the gold bulls a lifeline on the approach to $1,850. 

Potential catalysts for the day ahead will come in the US session with Fed's New York president, John Williams. and US Retail Sales. Then, the Fed will move into its blackout period until the next interest rate decision later this month. This leaves US data in focus.

Analysts at TD Securities explained that Retail Sales probably fell in December, even with higher prices boosting nominal values. ''Spending was likely held down by the fading of fiscal stimulus, payback for earlier-than-usual holiday shopping, and Omicron. We look for a notable 1.4% MoM decline in total sales (consensus: -0.1%) and a larger 2.0% retreat for the control group (consensus: flat). Real as well as nominal spending was likely still up solidly on QoQ basis and strongly on a YoY basis.''

End of update

The price of gold in Asia is under pressure as the US dollar stabilises following a series of down days for the greenback. XAU/USD is trading around $1,820 and down some 0.1% while the DXY index attempts to correct from the depths of the late December to YTD sell-off. 

The US dollar, as measured by the DXY index, sold off from 96.90 to a recent low of 94.66. In as many weeks, XAU/USD has climbed over 4%. However, in what could be more of a technical move, the yellow metal had failed to capitalise on the fall of US yields and the greenback on Thursday.

DXY dropped 0.4% and the US 10-year yield was down 2.5bps at 1.718%. ''Sustained weakness in the US dollar failed to push gold prices higher, as investors look concerned about Fed’s hawkish move to contain inflation,'' analysts at ANZ Bank argued.

However, this would not explain why the greenback and yields keep falling. Instead, the bond market appears to be repricing the pace of the Fed's balance sheet run-off following less hawkish rhetoric from Fed members, Jerome Powell, the chairman, and Philly Fed President Patrick Harker.

On Thursday, Harker said he sees the Fed starting to shrink its balance sheet “in late 2022 or early 2023” after the central bank has raised its target rate sufficiently, to around 1 per cent from near zero. The comments echoed that of Powell who said the Fed could start to shrink its balance sheet later this year at his confirmation hearing before the Senate Banking Committee.

"At some point, perhaps later this year, we will start to allow the balance sheet to run off, and that's just the road to normalising policy," he said, adding the US economy "no longer needs or wants" the Fed's very highly accommodative policies.

These comments come in contrast to that of other more hawkish officials, such as the Atlanta Fed President Raphael Bostic. "There is a risk inflation is likely to be elevated for an extended period of time and we need to respond directly, clearly and aggressively," Bostic told Reuters in an interview on Monday. 

Bostic explained that the central bank should be aggressive with regards to the balance sheet as well, allowing its holdings to decline by at least $100 billion a month, and with plans to quickly pull at least $1.5 trillion out of financial markets that he considers pure "excess liquidity."

The day ahead

For the day ahead, we will hear from Fed's New York president, John Williams. Then, the Fed will move into its blackout period until the next interest rate decision later this month. This leaves US data in focus. In this regard, Retail Sales will be of interest today. 

Analysts at TD Securities explained that Retail Sales probably fell in December, even with higher prices boosting nominal values. ''Spending was likely held down by the fading of fiscal stimulus, payback for earlier-than-usual holiday shopping, and Omicron. We look for a notable 1.4% MoM decline in total sales (consensus: -0.1%) and a larger 2.0% retreat for the control group (consensus: flat). Real as well as nominal spending was likely still up solidly on QoQ basis and strongly on a YoY basis.''

Gold technical analysis

If the US dollar rebounds from here, gold would be expected to be pressured towards critical support as follows:

The 38.2% Fibo near $1,810 guards $1,800 and the 61.8% Fibo.