Gold Price Forecast: XAU/USD recovers further from multi-week low, back above $1,915 level

• Gold gains positive traction for the second straight day and moves away from a multi-week low.
• A modest US Dollar pullback from a six-month top is seen driving flows towards the XAU/USD.
• Bets for one more rate hike by the Federal Reserve and a positive risk tone should cap the upside.

Gold price builds on the previous day's goodish bounce from the $1,900 mark, or over a three-week low and gains some follow-through traction, for the second successive day on Friday. The momentum lifts the XAU/USD to a three-day peak, around the $1,915-$1,916 region during the Asian session, though any meaningful appreciating move still seems elusive.

The US Dollar (USD) pulls back from its highest level since March touched on Thursday and is seen as a key factor driving some flows towards the US Dollar-denominated Gold price. The USD downtick could be attributed to some profit-taking amid a mildly softer tone surrounding the United States (US) government bond yields. That said, firming expectations that the Federal Reserve (Fed) will keep interest rates higher for longer should act as a tailwind for the US bond yields and the Greenback.

The incoming stronger US macro data continue to point to an extremely resilient economy and support prospects for further policy tightening by the Fed. The US Census Bureau reported on Thursday that Retail Sales increased by 0.6% in August, outperforming expectations for a 0.2% rise and the previous month's downwardly revised reading of 0.5%. Adding to this, the US Initial Jobless Claims rose less than expected, to 220K during the second week of September as compared to the 217K previous.

The US Bureau of Labor Statistics published the US Producer Price Index (PPI), which accelerated to 0.7% in August from the 0.4% previous and the annual rate climbed to 1.6%, faster than projections of 1.2% and 0.8% in July. This comes on top of the US CPI report released on Wednesday and points to a still-sticky inflation, which should allow the Fed to stick to its hawkish stance. The hawkish outlook favours the USD bulls and should keep a lid on any meaningful gains for the non-yielding Gold price.

Apart from this, a generally positive risk tone, bolstered by more stimulus from China, might further contribute to capping the upside for the safe-haven precious metal. Investors turned optimistic after the People’s Bank of China (PBoC) lowered its Reserve Requirement Ratio for much of the banking system by 25 bps – its second such move this year. This is expected to release more liquidity and potentially shore up growth in the world's second-largest economy, easing recession fears.

The aforementioned fundamental backdrop, along with the recent breakdown through a technically significant 200-day Simple Moving Average (SMA), suggests that the path of least resistance for the Gold price is to the downside. Hence, any subsequent move up might still be seen as a selling opportunity and runs the risk of fizzling out rather quickly. Traders now look to the US economic docket, featuring the Empire State Manufacturing Index and Prelim Michigan Consumer Sentiment Index.

Technical levels to watch