- Gold recovers solidly from the two-and-a-half year low hit on Wednesday.
- The sharp pullback in US bond yields triggers dollar profit-taking and offers support.
- The prospect of more aggressive central banks and the risk appetite environment could cap XAU/USD.
The Prayed it bounces quickly from its lowest level since April 2020, touched earlier this Wednesday, and turns positive for the second day in a row. The momentum leads to XAU/USD to a new weekly maximum, around the area of ​​$1,652, during the beginning of the American session.
British yields fell sharply after the Bank of England said it would buy bonds at whatever scale was necessary to restore orderly market conditions. The contagion effect triggers a sharp decline in US Treasury yields, forcing the dollar to give back early gains to hit a new two-decade high. This turns out to be a key factor driving aggressive intraday shorting of dollar-denominated gold.
However, upside potential appears limited on the prospect of more aggressive policy tightening by global central banks, including the Federal Reserve. Investors seem convinced that the US central bank will continue to raise interest rates at a faster pace to combat stubbornly high inflation. This could act as a tailwind for US bond yields and favors dollar bulls, which, in turn, should cap gains from non-yielding gold.
Aside from this, a positive shift in global risk sentiment – as evidenced by the strong rally in equity markets – should keep haven XAU/USD capped. Even technically, last week’s break below a short-term trading range supports prospects for an extension of the multi-month downtrend. Therefore, it is prudent to wait for strong follow-on buying before confirming that gold has bottomed in the short term.
Market participants are now awaiting speeches from influential FOMC members, including Chairman Jerome Powell. This, along with US bond yields, will influence dollar price dynamics and give gold some momentum. Aside from this, traders will take cues from broader risk sentiment to take advantage of short-term opportunities around XAU/USD. However, the fundamental background suggests that the intraday rally is in danger of fading fast.
Technical levels to watch
Source: Fx Street
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