Gold Price Forecast: XAU/USD recovers from three-week low, upside potential seems limited

• Gold price attracts some buying and reverses a part of the overnight losses to a multi-week low.
• Bets that the Federal Reserve will pause in September undermine the US Dollar and lend support.
• The prospects for one more rate hike by the end of this year should keep a lid on any further gains.

Gold price edges higher during the Asian session on Thursday and for now, seems to have snapped a two-day losing streak to a nearly three-week low, around the $1,906-$1,905 region touched the previous day. The XAU/USD currently trades just above the $1,910 area, though lacks bullish conviction. Moreover, the fundamental backdrop still seems tilted in favour of bearish traders and supports prospects for an extension of a two-week-old downtrend, from a one-month peak near the $1,953 zone touched on September 1.

In the absence of any big surprises from the United States (US) consumer inflation figures, market participants now seem assured that the Federal Reserve (Fed) will keep interest rates steady at its policy meeting next week. This, in turn, keeps the US Dollar (USD) bulls on the defensive and lends some support to the Gold price. The US Bureau of Labor Statistics (BLS) reported that the headline US Consumer Price Index (CPI) surged to 3.7% on a yearly basis in August from 3.2% in July. The reading was slightly above expectations for a reading of 3.6%, though the monthly print matched forecasts and came in at 0.6%.

Moreover, the core CPI, which strips out volatile items like food and fuel, also met consensus estimates and rose 4.3% during the reported month. Nevertheless, the data pointed to still-sticky inflation and keeps hopes for one more Fed rate hike move by the end of this year. In fact, the current market pricing indicates a more than 50% chance of a 25 basis points (bps) lift-off either in November or December. This, in turn, might continue to act as a tailwind for the Greenback and keep a lid on any meaningful appreciating move for the non-yielding Gold price, warranting some caution for aggressive bullish traders.

Even from a technical perspective, this week's sustained break and acceptance below the very important 200-day Simple Moving Average (SMA) suggests that the path of least resistance for the XAU/USD is to the downside. Hence, any subsequent move up might still be seen as a selling opportunity and remain capped. Bearish traders, however, might wait for some follow-through selling below the $1,900 psychological mark before positioning for any further losses. Investors now look to the outcome of the highly-anticipated European Central Bank (ECB) meeting for some meaningful impetus around the Gold price.

Apart from this, traders will take cues from the US economic docket – featuring the release of the usual Weekly Initial Jobless Claims, the Producer Price Index (PPI) and monthly Retail Sales. The data might influence the USD price dynamics, which, along with the post-ECB volatility, should allow traders to grab short-term opportunities around the Gold price.

Technical levels to watch