XAU/USD corrects further from two-month high, slides to $1,830 area

  • Gold corrected further from a two-month high touched on Thursday amid hawkish Fed expectations.
  • The risk-off mood, retreating US bond yields acted as a tailwind and helped limit any further downfall.
  • Investors might also refrain from placing aggressive bets ahead of the FOMC policy meeting next week.

Gold extended the overnight retracement from the $1,848 area, or a two-month high and witnessed some follow-through selling on the last trading day of the week. The corrective pullback picked up pace during the early part of the European session and dragged spot prices to the $1,828 region in the last hour. The downfall lacked any obvious catalyst and could be solely attributed to some profit-taking amid expectations that the Fed will tighten its monetary policy at a faster pace than anticipated.

Investors now seem convinced that the Fed would begin raising interest rates in March to combat stubbornly high inflation. The bets were reaffirmed by last week’s data, showing that the headline US CPI surged to the highest level since June 1982 and core CPI registered the biggest advance since 1991. Moreover, the markets have also been pricing in the possibility for a total of four rate hikes in 2022, which, in turn, was seen as a key factor that drove flows away from the non-yielding gold.

Meanwhile, concerns that rising borrowing costs could dent the earnings outlook for companies tempered investors’ appetite for perceived riskier assets. This was evident from a weaker trading sentiment around the equity markets, which could extend support to the safe-haven gold. The dominant risk-off mood dragged the US Treasury bond yields further away from the multi-year highs touched earlier this week. This should further help limit the downside for the precious metal, at least for the time being.

Traders might also refrain from placing aggressive directional bets and prefer to wait on the sidelines ahead of the upcoming FOMC policy meeting on January 25-26. In the absence of any major market-moving economic releases from the US, this further makes it prudent to wait for a strong follow-through selling before confirming that gold has topped out. Nevertheless, the XAU/USD, at current levels, remains on track to post gains for the second successive week.

Technical outlook

From a technical perspective, the XAU/USD, so far, has managed to find some support near the $1,830 resistance breakpoint. Some follow-through selling would pave the way for a further decline and accelerate the fall towards the $1,812 horizontal zone. The next relevant support is pegged near the very important 200-day SMA, currently around the $1,804 region, and of the $1,800 round figure. This is closely followed by ascending trend-line support, around the $1,790 region.

On the flip side, the $1,840-$1,842 area now seems to act as an immediate resistance ahead of the overnight swing high, around the $1,848 region. A sustained strength beyond has the potential to lift gold prices further towards a downward-sloping trend-line extending from June 2021 swing high, currently around the $1,860 region.


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