Saturday, May 21, 2022

Gold Price Forecast: XAU/USD falls to three-week low, ascending trend-line breakdown in trend

  • Gold continued its decline for the third day in a row and fell to a three-week low.
  • A bullish Fed, rising US bond yields, a strong USD contributed to the slide.
  • The prevailing risk-off mood could help limit any further losses for the safe-haven metal.

Gold saw some follow-through selling after the FOMC fell for the third consecutive day on Friday. Bearish pressure remained unabated during the first half of the European session and dragged spot prices to a three-week low, around the $1,790 zone.

The Fed took a more drastic stance on Wednesday, indicating that it may raise interest rates at a faster rate than expected to contain rising inflation. The money market was quick to react and began pricing in a five-quarter-point rate hike likely by the end of 2022. Short-term interest rate futures also suggest a 20% risk that the first increase in March could be 50 basis points. This, in turn, pushed the 2-year US government bond yield, which is more sensitive to rate hike expectations, to a 23-month high and continued driving flows away from non-yielding gold.

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A rise in US Treasury bond yields along with expectations of a more aggressive policy response by the Fed pushed the US dollar to its highest level since July 2020. The greenback was further bolstered by the release of an Advance US GDP report on Thursday, which showed the world’s largest economy grew at a 6.9% annual pace during the fourth quarter. For 2021 as a whole, the economy grew by 5.8% and recorded its strongest growth in nearly four decades. A strong buck was seen as another factor that put pressure on dollar-denominated gold and contributed to the decline.

Furthermore, some technical selloff could be attributed to Friday’s decline, which is on a sustained break below the $1,800 round-figure mark. That said, the prevailing risk-off mood – amid concerns about a possible armed conflict in Ukraine – could put off bearish traders and limit losses for safe-haven gold. Traders are now eyeing US macro releases – the core personal consumption expenditure price index and the revised Michigan Consumer Sentiment Index – for a fresh stimulus. Nevertheless, XAU/USD is on track to register its worst weekly decline since the end of November.

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technical approach

From a technical perspective, gold has now confirmed a near-term bearish break below an upward sloping trend line from August 2021 lows. This, in turn, favors the prospects for another depreciation move. The downside outlook is strengthened by bearish technical indicators on the daily chart, which are still far from being in oversold territory. Therefore, a subsequent decline towards the intermediate support at $1,785, en route to the $1,785-$1.768 area, remains a distinct possibility.

On the other hand, a recovery attempt may now face stiff resistance near the mentioned ascending trend-line support breakpoint near the $1,798 area. Any further upside could be seen as a selling opportunity and it is limited near the very important 200-day SMA, which is currently near the $1,805 level. The latter should act as a key point for traders, which, if cleared decisively, could trigger a short-covering move towards the $1,830-$1,832 stable resistance.

gold daily chart

level to watch

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Nation World News Desk
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