Most Read: Gold Prices Facing First Topside Hurdle. What’s the Outlook for XAU/USD?
Gold prices (XAU/USD) have accelerated their recovery in recent days, rising strongly in the last ten sessions, after bouncing off cluster support at $1,690/$1,675 earlier in the month. This week alone, the precious metal is up more than 3% to trade around $1,780 per troy ounce, supported by a weaker U.S. dollar, but mostly by lower bond rates following the Fed's latest decision and guidance.
The July FOMC meeting gave way to a sharp pullback in Treasury yields, with the 2-year yield dropping to its lowest level in nearly a month (2.84%) as comments made by Chair Powell were taken as a signal that peak Fed hawkishness has passed. For context, the central bank chief said another unusually large hike will be data-dependent at his press conference, suggesting that policymakers may slow the pace of the tightening cycle in the future.
Although observed CPI has soared to four-decade highs, it is likely to start rolling over in the coming months due to falling commodity prices, including those in the energy sector, such as oil and gasoline. This, combined with the sharp decline in market-based measures of expected inflation, may help reduce the need to continue to withdraw accommodation forcefully.Fewer hikes on the horizon could amplify the upside for XAU/USD.
Another catalyst that may further support gold is the slump in U.S. business activity. U.S. gross domestic product contracted again in the April-June period for the second consecutive quarter, increasing the probability of a hard landing.
With the economy on the brink of recession by some metrics, Federal Reserve officials may pivot to a more dovish stance later this year. Softening incoming data in the macro front may prompt traders to start preparing for this scenario, reinforcing the yellow metal’s appeal in the near term.
Looking ahead to next week, there are several high-impact events on the calendar worth watching, including ISM manufacturing, ISM services and labor market data. All of these reports are likely to show a further slowdown in economic growth, an outcome that could raise the risk of a downturn. Gold could thrive in this environment.
Gold prices have fallen aggressively from their 2022 highs set in early March, but have begun to mount a recovery in recent weeks after failing to break below a key technical floor in the $1,675/$1,690 area, where the 38.2% retracement of the 2015/2020 rally aligns with long-term trendline support and several 2021 lows.
If the bulls maintain control of the market in the coming days, initial resistance appears at $1,785, followed by $1,835. On further strength, the focus shifts upwards to $1,880. On the flip side, if sellers resurface and trigger a bearish reversal, the first support to consider comes in at $1,690/$1,675. If this area were to be breached, we could see a move towards $1,615.
Gold Prices Chart Prepared Using TradingView
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