Gold Price Forecast: XAU/USD runs up to test critical resistance with eyes on a significant bullish breakout

• The gold price firms to take on ket resistance as the US dollar tails off from fresh bull cycle highs. 
• Gold bulls eye a 50% mean reversion with the prospects of a break to $1,735 beyond there.

The gold price has added to gains on the day, although is starting to tail off from the New York session highs of $1,719.29 currently. The precious metal is around 0.8% higher on the day, having risen from a low of $1,691.46 to a high of $1,719.29 as the greenback and US yields retrace.

The US dollar has fallen off the strongest levels in two decades as per the DXY index, which measures the greenback vs. a basket of currencies. The index was last seen down 0.44% to 109.76, after earlier touching 110.786 the highest since 2002. US Treasury yields also slid from early highs, bullish for gold since it offers no interest. The yield on the US 10-year note was last seen down 2.45% to 3.271%.

Meanwhile, however, hawkish comments from Fed Chair Jerome Powell were compounded by signs of an economic slowdown in Europe and China and aggressive steps by major central banks to tame inflation, all of which has been underpinning the greenback of late. Additionally, data signalling strength in the US economy has prompted traders to bet on a 75-basis-point interest rate hike by the Fed later this month. Despite last week's mixed jobs data in the Nonfarm Payrolls, the Fed fund futures are still implying that investors are pricing in a more than 78% chance of such a move. Nevertheless, the Atlanta Fed GDP nowcast estimates for the third revised 1.4% from the 2.6% pace in the previous estimate on Sept. 1. The next update is scheduled for Friday, ahead of next week's critical US Consumer Price Index. 

More immediately, the European Central Bank is meeting on Thursday which could be a further weight to gold prices with the board leaning towards a 75bp rate hike given that the ECB is behind the curve. ''The possibility that failure to deliver a 75bp rate hike could send the euro spiralling lower. Markets look set to remain volatile and it is important to remain open to the potential for swift changes in sentiment given current positioning,'' analysts at ANZ Bank said.

Meanwhile, ''traders are questioning whether the move lower in precious metals is fundamentally running out of steam, after a repricing in rates markets has left market expectations more closely in line with the Fed's outlook for rates,'' analysts at TD Securities said who argue that while rates pricing now appears closer to fair value.

''Gold markets have failed to price the implications of a sustained period of restrictive interest rates,' they said, expecting odds of a major capitulation event growing with every tick lower in gold prices. The analysts say that this ''could coincide with a break below a multi-decade uptrend in the yellow metal near $1675/oz.''

''Gold markets still feature an extremely concentrated and bloated position held by a small number of family offices and proprietary trading shops, which are increasingly at risk as prices approach their pandemic-era entry levels. At the same time, the margin of safety against a short squeeze continues to grow, increasing odds that we can break through this critical support. And, our tracking of Shanghai gold trader positioning suggests that China's appetite for gold is finally starting to ebb, potentially adding into a liquidation vacuum.''

Gold technical analysis

The price is headed towards a price imbalance near $1,721. Beyond there, a 50% mean reversion comes in near $1,727 prior structure. On the downside, however, a retest of the 2021 lows around $1,676 is feasible, but the upside is playing out which leaves the prospects of a break to $1,735 on the table in the meantime as per the projected W-formation.