Gold Price Analysis: XAU/USD Pulls Back on Dollar Strength, Fall Seems Limited

• The price of gold falls for the second day in a row amid a slight rally in the US dollar.
• A combination of factors should help limit any significant pullback from a multi-month high.
• Expectations for lower Fed rate hikes could provide support amid the risk of a possible global recession.

The price of gold (XAU/USD) It moves lower on Tuesday for the second day in a row and is away from its highest level since April, around $1,929 reached the day before. XAU/USD remains under pressure during the European session, although manages to stay above the $1,900 level.

The modest strength of the US dollar weighs on the price of gold

The US dollar (USD) extends the previous day’s rebound from a seven-month low and gains traction amid a modest rebound in Treasury yields This turns out to be a key factor weighing on the prices of US dollar-denominated commodities, including gold. That being said, expectations of a less aggressive tightening of monetary policy by the Federal Reserve (Fed) acts as a headwind for the dollar.

Expectations for lower rate hikes by the Federal Reserve to limit losses

Investors seem convinced the Fed will soften its hawkish stance given signs of easing inflationary pressures and the risk of a possible recession. In addition, several members of the Federal Open Market Committee (FOMC) were in favor of lower rate hikes and raised expectations for a 25 basis point hike in February. This, in turn, should continue to provide some support to the gold price without yields.

Fears of a recession could continue to support the price of gold

On the other hand, a softer risk tone could help limit any significant decline for the safe-haven XAU/USD, at least for now. Market sentiment remains fragile amid concerns about headwinds from the worst COVID-19 outbreak in China. Besides, the Protracted war between Russia and Ukraine has stoked concerns about a deeper global economic recession.

Slightly better Chinese macro data fails to provide momentum

This, to a large extent, eclipses a fact of the Chinese Gross Domestic Product (GDP) better than expected, which showed that the economy grew at an annualized rate of 2.9% in the fourth quarter. In addition, improving trends in Chinese retail sales and industrial production fueled optimism about the recovery of the world’s second largest economy. This, however, fails to boost investor confidence.

The correction of the fall could be considered a buying opportunity

The aforementioned fundamental background suggests that the path of least resistance for the gold price is up. Therefore, any corrective pullback could be seen as a buying opportunity and is more likely to remain limited. Market participants are now waiting for the release of the US Empire State Manufacturing Index to get some momentum later at the start of the American session.

Gold Price Technical Outlook

From a technical point of view, gold is in a medium term uptrend, which favors more increases. However, the latest accelerated recovery in late December and January pierced the upper limit of its bullish channel, suggesting a possible exhaustion and the risk of a correction, though not a reversal.

There is a risk of a pullback to the lower channel line in the region of $1,895-$1,900 which will act as support and decide the next directional move for gold. The 14-day Relative Strength Index (RSI) is currently coming out of overbought, which further reinforces the idea that corrective slippage could emerge, and today will be critical of that, as a fix below the 70 level of the RSI will provide a clear technical signal to sell, adding further momentum to the pullback. If so, a breakout and close below the channel line on the $1,895 likely to attract new sales and a sharp drop to an initial target in the $1,845 and later in the $1,825.

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