Gold Price Forecast: XAU/USD weakens below $1,700 for the first time since July

• Gold slides below the $1,700 mark on Thursday, hitting its lowest level since July 21.
• Aggressive Fed rate hike bets, rising US bond yields and stronger USD exert pressure.
• The risk-off mood fails to impress bullish traders or lend any support to the commodity.

Gold prolongs this week's bearish trend for the third straight day on Thursday and drops to its lowest level since July 21 during the early North American session. The XAU/USD slips below the $1,700 round-figure mark and seems vulnerable to extending the downward trajectory.

Firming expectations that the Fed will continue to tighten its monetary policy more aggressively to tame inflation turns out to be a key factor driving flows away from the non-yielding gold. In fact, the markets are pricing in a greater chance of a 75 bps Fed rate hike at the September meeting and the bets were reaffirmed by Fed Chair Jerome Powell's hawkish remarks last Friday.

This, in turn, leads to an extended sell-off in the US debt markets and pushes the yield on the 2-year government bond, which is highly sensitive to rate hike expectations, to a nearly 15-year high. Elevated US Treasury bond yields lift the US dollar back closer to a two-decade peak touched earlier this week, which is exerting additional pressure on the dollar-denominated gold.

The ongoing downward trajectory, meanwhile, seems rather unaffected by the risk-off environment, which tends to benefit the traditional safe-haven gold. The market sentiment remains fragile amid worries about a deeper global economic downturn. The fears were further fueled by Thursday's disappointing release of the Caixin/Markit Chinese Manufacturing PMI, which fell to 49.5 in August.

Adding to this, headwinds stemming from fresh COVID-19 lockdowns in China further temper investors' appetite for perceived riskier assets. This is evident from a generally weaker tone around the equity markets, though did little to impress bullish traders or lend any support to gold. This, in turn, suggests that the path of least resistance for spot prices is to the downside.

Next on tap will be the release of the US ISM Manufacturing PMI, which might influence the USD and provide some impetus to gold. The focus, however, will remain on the closely-watched US monthly jobs report on Friday. The popularly known NFP will provide a fresh insight into the economy's health in the face of rising rates and stubbornly high inflation. This will play a key role in driving the near-term USD demand and help determine the next leg of a directional move for the yellow metal.

Technical levels to watch