Gold Price Forecast: XAU/USD drops back closer to $1,930 level amid stronger US Dollar

• Gold price drifts lower for the second straight day and is pressured by modest US Dollar strength.
• Bets for more rate hikes by the Federal Reserve turn out to be a key factor underpinning the buck.
• Traders might wait for the US consumer inflation data on Thursday before placing directional bets.

Gold price remains under some selling pressure for the second successive day on Tuesday and drops to a fresh daily low, around the $1,931 area during the Asian session. The XAU/USD, however, manages to hold above a three-and-half-week low touched last Friday.

The prospects for further policy tightening by the Federal Reserve (Fed) assist the US Dollar (USD) to regain some positive traction, which, in turn, is seen as a key factor weighing on the Gold price. In fact, market participants seem convinced that the Fed will deliver one more 25 basis point (bps) rate hike in September or November and the bets were reaffirmed by the monthly employment details from the United States (US). Despite a slight disappointment from the headline NFP, solid wage growth and an unexpected downtick in the jobless rate pointed to the continued tightness in the labour market. This, in turn, raised the odds of a soft landing for the US economy and should allow the US central bank to stick to its hawkish stance.

Adding to this, Fed Governor Michele Bowman said on Monday that additional interest rate hikes will likely be needed to lower inflation to the central bank's 2% target. In remarks prepared for delivery to a "Fed Listens" event in Atlanta, Bowman added that  inflation remains too elevated, and job growth and other indications of activity show the economy has continued expanding at a "moderate pace." This, in turn, remains supportive of elevated US Treasury bond yields, which act as a tailwind for the USD and contribute to driving flows away from the non-yielding Gold price. Meanwhile, New York Fed President John Williams noted that the central bank will need to keep the restrictive stance for some time.

Williams, however, did not rule out the possibility of lowering rates in early 2024, depending on economic data. He added that inflation was coming down as hoped and that while he expected unemployment to rise slightly as the economy cooled. This might hold back the USD bulls from placing aggressive bets and help limit losses for the US Dollar-denominated Gold price. Traders might also prefer to wait for a fresh catalyst from the latest consumer inflation figures from China and the US, due for release on Wednesday and Thursday, respectively. Investors will look for signs of deflation, which could push back against expectations for additional rate hikes by the Fed and provide a goodish boost to the precious metal.

Given that consensus estimates point to a further moderation in inflationary pressures, surprisingly stronger data should lift bets for one more Fed rate hike by the end of this year. This, in turn, could weigh heavily on the Gold price, which is seen as a hedge against inflation. The mixed fundamental backdrop warrants some caution before positioning for a further depreciating move for the Gold price. The emergence of fresh selling, however, suggests that the downfall witnessed over the past three weeks or so is still far from being over and suggests that the path of least resistance for the XAU/USD is to the downside.

Technical levels to watch