Gold Price Forecast: XAU/USD rebounds from three-week low amid modest USD weakness

• Gold stages a modest recovery from over a three-week low touched earlier this Thursday.
• The emergence of some USD selling offers support, though the uptick lacks follow-through.
• Aggressive Fed rate hike bets, elevated US bond yields act as a headwind for the XAU/USD.

Gold bounces off a new three-week low touched earlier this Thursday and sticks to its modest gains through the first half of the European session. The XAU/USD is currently placed near the daily high, just below the $1,635 region, though any meaningful upside still seems elusive.

The US dollar edges lower and trims a part of the previous day's strong gains, which turns out to be a key factor offering some support to the dollar-denominated gold. Apart from this, growing worries about a deeper global economic downturn and the prevalent cautious market mood act as a tailwind for the safe-haven precious metal.

That said, the prospects for a more aggressive policy tightening by major central banks keep a lid on any meaningful upside for the non-yielding gold. The markets have been pricing in jumbo rate hikes by the European Central Bank and the Bank of England. The Federal Reserve is also expected to stick to its aggressive rate-hiking cycle.

In fact, the CME's FedWatch tool indicates a nearly 100% chance of the fourth successive supersized 75 bps rate increase at the next FOMC policy meeting in November. The bets were reaffirmed by the recent hawkish remarks by several Fed officials, reiterating that the US central bank is committed to its aggressive fight against soaring prices.

This, in turn, pushes the yield on the rate-sensitive 2-year US government bond to a new 15-year peak and the benchmark 10-year Treasury note to its highest level since the 2008 financial crisis. Elevated US bond yields should limit any meaningful USD downfall. This, in turn, suggests that the path of least resistance for gold is to the downside.

Market participants now look to the US economic docket, featuring the Philly Fed Manufacturing Index, Weekly Initial Jobless Claims and Existing Home Sales data. This, along with speeches by influential FOMC members and the US bond yields, will drive the USD demand. Apart from this, the broader risk sentiment should provide some impetus to gold.

Technical levels to watch