Gold Price Forecast: XAU/USD drops to three-week low, ascending trend-line breakdown in play

• Gold continued losing ground for the third straight day and dropped to a three-week low.
• The Fed's hawkish stance, elevated US bond yields, stronger USD contributed to the slide.
• The prevalent risk-off mood could help limit any further losses for the safe-haven metal.

Gold extended the post-FOMC decline and witnessed some follow-through selling for the third successive day on Friday. The bearish pressure remained unabated through the first half of the European session and dragged spot prices to a fresh three-week low, around the $1,790 region.

The Fed took a more hawkish stance on Wednesday and indicated that it could raise interest rates at a faster pace than anticipated to contain surging inflation. The money market was quick to react and started pricing in the possibility of five quarter-point rate hikes by the end of 2022. Short-term interest rate futures also imply a 20% risk that the first hike in March could be 50 basis points. This, in turn, pushed the 2-year US government bond yields, which is more sensitive to rate hike expectations, to a 23-month high and continued driving flows away from the non-yielding gold.

Expectations for a more aggressive policy response by the Fed, along with elevated US Treasury bond yields pushed the US dollar to the highest level since July 2020. The greenback was further underpinned by Thursday's release of the Advance US GDP report, which showed that the world's largest economy grew at a 6.9% annualize pace during the fourth quarter. For 2021 as a whole, the economy expanded by 5.8% and notched its strongest growth in nearly four decades. A stronger buck was seen as another factor that exerted pressure on the dollar-denominated gold and contributed to the decline.

Apart from this, Friday's downfall could further be attributed to some technical selling on a sustained break below the $1,800 round-figure mark. That said, the prevalent risk-off mood – amid concerns about a potential armed conflict in Ukraine – could hold back bearish traders and limit losses for the safe-haven gold. Traders now eye US macro releases – the Core Personal Consumption Expenditure Price index and revised Michigan Consumer Sentiment Index – for a fresh impetus. Nevertheless, the XAU/USD remains on track to record its worst weekly slide since late November.

Technical outlook

From a technical perspective, gold has now confirmed a near-term bearish break below an upward sloping trend-line extending from the August 2021 swing low. This, in turn, supports prospects for a further depreciating move. The negative outlook is reinforced by bearish technical indicators on the daily chart, which are still far from being in the oversold territory. Hence, a subsequent fall towards the $1,785 intermediate support, en-route the $1,770-$1.768 region, remains a distinct possibility.

On the flip side, attempted recovery moves might now confront stiff resistance near the mentioned ascending trend-line support breakpoint, around the $1,798 region. Any further move up could be seen as a selling opportunity and remain capped near the very important 200-day SMA, currently around the $1,805 area. The latter should act as a pivotal point for traders, which if cleared decisively might trigger a short-covering move towards the $1,830-$1,832 static resistance.

Gold daily chart

Levels to watch