XAU/USD Extends Recovery From Monthly Low, Upside Potential Seems Limited

• Gold gains traction for the second day in a row and recovers further from the monthly low.
• A pullback in US bond yields weighs on the USD and benefits the yielding yellow metal.
• Risk appetite and bullish Fed outlook should limit further XAU/USD gains.

The price of gold (XAU/USD) has built on the previous day’s post-FOMC bounce from levels below $1,900 to new monthly lows, and has gained some continuation traction for the second day in a row Thursday. XAU/USD maintains its modest intraday gains during the early part of the European session on Thursday and trades close to the daily high, around the region of $1,935. As investors looked beyond the expected Fed decision, a pullback in US Treasury yields has kept US dollar bulls on the defensive and benefited gold prices, denominated in dollars. Apart from this, the rally lacks any obvious fundamental catalyst and risks ending quickly.

The Fed announced on Wednesday the beginning of the tightening cycle of its monetary policy and raised its fund target rate by 25 basis points for the first time since 2018. The Fed also hinted that would adopt a more aggressive response to combat stubbornly high inflation. In fact, the so-called dot plot indicated that the Fed could raise interest rates in the remaining six meetings of 2022. In the post-meeting press conference, Fed Chairman Jerome Powell added that the central bank American could begin to reduce its nearly $9 trillion balance sheet as soon as the next meeting in May. This, in turn, should limit any significant gains for non-yielding gold.

Bulls might refrain from opening aggressive positions amid signs of progress in ceasefire talks between Russia and Ukraine. Ukrainian President Volodymyr Zelensky said negotiations were becoming more realistic, while Russia said the proposals under discussion were close to a deal. The optimism about a diplomatic solution to end the war in Ukraine continued to support positive sentiment, which could further contribute to limiting gains for safe-haven gold. Therefore, it will be prudent to wait for some strong continuation buying before confirming that the sharp pullback from the $2,070 region, or the highest level since August 2020, is over.

Market participants now await the US economic calendar, with the release of the Philadelphia Fed Manufacturing Index, the usual weekly data for initial jobless claims and industrial production. This, coupled with US bond yields, could influence USD price action. Aside from this, investors will take cues from new developments around the Russo-Ukrainian war and broader market risk sentiment to take advantage of some short-term opportunities around gold.

gold technical outlook

From a technical perspective, gold showed some resilience below the $1,900 level and managed to rebound from the 61.8% Fibonacci retracement of the strong advance from $1,780 to $2,070. The subsequent strength favors the bulls and supports the prospects for further gains. That said, the neutral technical indicators on the daily chart have yet to confirm the constructive outlook. Therefore, any further moves to the upside are more likely to face stiff resistance near the breakout region. $1,948-$1,950which is followed by the Fibonacci 38.2% around the area of $1,960. Sustained strength above this region has the potential to push gold towards the key psychological level of $2,000which coincides with the 23.6% Fibonacci retracement.

On the other hand, the 50% Fibonacci around the region of $1,925, now seems to defend the immediate fall. Some continuation selling could drag gold prices towards a 61.8% Fibonacci test around the $1,895. The next relevant support is near the region of $1,875-$1,870, which if broken decisively should pave the way for another short-term bearish move. XAU/USD could then turn vulnerable and drop to support at $1,850 on track for the very important 200-day SMA, currently around the $1,815.

gold daily chart

Gold additional levels