Gold Price Forecast: XAU/USD remains on the defensive amid modest USD strength, risk-on

• Gold edges down for the third straight day amid a modest pickup in the USD demand.
• The risk-on impulse further exerts some downward pressure on the safe-haven metal.
• The uncertainty over the size of further rate hikes caps the USD and extends support.

Gold slips into negative territory for the third straight day on Friday and remains below the $1,800 mark through the first half of the European session. The XAU/USD is currently trading around the $1,787 area and the fundamental backdrop supports prospects for a further intraday depreciating move.

The US dollar gains some positive traction and moves away from its lowest level since late June touched the previous day, which, in turn, exerts some downward pressure on the dollar-denominated gold. The recent comments by several Fed officials indicate that the US central bank will continue to tighten its monetary policy further. In fact, San Francisco Fed President Mary Daly said that a 50 bps interest rate hike in September makes sense, though she is open to a bigger rate hike if data warrants it.

Earlier this week, St. Louis Fed President James Bullard, Chicago Fed President Charles Evans and Minneapolis Fed President Neel Kashkari also backed the case for additional rate hikes. The hawkish outlook allows the US Treasury bond yields to remain elevated near a multi-week high. This continues to act as a tailwind for the greenback and further act as a headwind for the non-yielding yellow metal. Apart from this, the risk-on mood further dents demand for safe-haven assets and weigh on gold.

Market participants, however, remain divided over the size of the next rate hike by the Fed amid signs of easing inflationary pressure in the US.  The US CPI report released on Wednesday revealed that consumer prices were unchanged in July. Furthermore, the US Producer Price Index unexpectedly fell in July for the first time in two years, suggesting that inflation may have peaked. This could cap gains for the USD and help limit losses for gold, warranting some caution for aggressive bearish traders.

Moving ahead, Friday's US economic docket, featuring the Preliminary Michigan US Consumer Sentiment Index, might provide some impetus to gold later during the early North American session. Apart from this, the US bond yields will influence the USD price dynamics. Traders would further take cues from the broader market risk sentiment to grab short-term opportunities on the last day of the week.

Technical levels to watch