Gold Price Forecast: XAU/USD sticks to modest gains around $1,950 area, lacks follow-through

• Gold price regains positive traction on Friday, though the upside potential seems limited.
• Looming recession risks, the worsening US-China relations lend support to the XAU/USD.
• The hawkish outlook by major central banks should cap any meaningful upside for the metal.

Gold price attracts some buying during the Asian session on Friday and reverses a part of the previous day's steep decline to over a two-week low touched in the aftermath of upbeat macro data from the United States (US). The XAU/USD currently trades around the $1,950 region, up 0.20% for the day, though the upside seems limited in the wake of the increasing likelihood of more interest rate hikes by the Federal Reserve (Fed).

Bets for more rate hikes by Federal Reserve might cap Gold price

It is worth recalling that Fed Chair Jerome Powell, addressing the press after lifting borrowing costs to the highest level since 2001 on Wednesday, said that the economy still needs to slow and the labour market to weaken for inflation to credibly return to the 2% target. Adding to this, the US Commerce Department reported on Thursday that the world's largest economy expanded by a 2.4% annualized pace during the April-June quarter. Adding to this, the Initial Jobless Claims unexpectedly fell to 221K during the week ended July 22. This points to an extremely resilient US economy and supports prospects for further policy tightening by the Fed. This led to the overnight sharp rise in the US Treasury bond yields, which assists the US Dollar (USD) to stand tall near a two-and-half-week high and could act as a headwind for the Gold price.

Hawkish major central banks also warrant caution for bullish traders

Furthermore, the European Central Bank (ECB) kept the door for further rate hikes wide open and noted that inflation, though has been declining, is still expected to remain too high for too long. The ECB, however, did not share any forward guidance about upcoming moves and said that the Governing Council will continue to follow a data-dependent approach to determining the appropriate level and duration of restriction. Meanwhile, the Bank of England (BoE) is also expected to follow suit and raise its benchmark interest rate by 25 bps on August 3, to 5.25%, or the highest since early 2008. The markets have been pricing in two more BoE rate hikes by the end of this year as price pressures persist. This might further contribute to capping any meaningful gains for the non-yielding Gold price and warrants caution for bulls.

Looming recession/geopolitical risks could support Gold price

That said, worries about economic headwinds stemming from rising borrowing costs, further fueled by the disappointing release of flash PMI prints this week, continue to weigh on investors' sentiment and seem to lend support to the safe-haven precious metal. Apart from this, geopolitical risk and the worsening US-China relations might hold back traders from placing aggressive bearish bets around the Gold price, at least for the time being. In fact, the Washington Post, citing three officials familiar with the matter, reported that the White House has decided it will bar Hong Kong’s top government official from attending a major economic summit in the US this fall. Responding to the move, a spokesman for the Chinese Embassy in Washington, Liu Pengyu, said that the decision violates the APEC rules and the US’s break of the commitment.

Traders now look to US Core PCE Price Index for a fresh impetus

Moving ahead, the market focus now shifts to the release of the US Personal Consumption Expenditures (PCE) Price Index, the Fed's preferred inflation gauge, due later during the early North American session. The data might influence market expectations about the Fed's next policy move, which, in turn, should drive the USD demand and provide a fresh impetus to the Gold price. Traders will further take cues from the broader risk sentiment to grab short-term opportunities around the XAU/USD on the last day of the week. Nevertheless, the metal seems poised to register modest losses for the first time in the previous four weeks as the focus shifts to next week's important US macro data scheduled at the start of a new month.

Key levels to watch