Gold Price Forecast: XAU/USD edges lower on stronger USD, Fed rate hike jitters

• Gold meets with a fresh supply on Monday and is pressured by a combination of factors.
• Hawkish Fed expectations lift the USD to a two-decade high and weigh on the commodity.
• A positive risk tone further undermines demand for the traditional safe-haven XAU/USD.
• Thin trading volumes on the back of a US holiday warrant some caution for bearish traders.

Gold edges lower on the first day of a new week and erodes a part of Friday's strong gains. The XAU/USD remains on the defensive through the early European session, though lacks follow-through selling and so far, has managed to hold above the $1,700 round-figure mark.

The US dollar jumps to a new 20-year high on Monday and turns out to be a key factor exerting downward pressure on the dollar-denominated gold. Despite the mixed US jobs report released on Friday, growing acceptance that the Fed will stick to its aggressive policy tightening path continues to underpin the greenback. In fact, the markets are pricing in a greater chance of a supersized 75 bps rate hike at the next FOMC meeting on September 20-21.

The bets were reaffirmed by the recent hawkish remarks by hawkish remarks by several Fed officials, indicating that interest rates are likely to keep rising until inflation is substantially closer to the 2% target. Moreover, the Reserve Bank of Australia, the European Central Bank and the Bank of England are also expected to continue to raise interest rates. This is seen as another factor that contributes to driving flows away from the non-yielding gold.

Apart from this, signs of stability in the equity markets further seem to undermine demand for traditional safe-haven gold. That said, growing worries about a deeper economic downturn should keep a lid on any optimism. This, along with relatively thin trading volumes on the back of the Labor Day holiday in the US, could hold back traders from placing aggressive bets around gold. This, in turn, warrants some caution before positioning for any further losses.

Technical levels to watch