Gold Price Forecast: XAU/USD refreshes weekly high amid a sharp fall in bond yields, USD

• Gold stages a solid recovery from a two-and-half-year low touched earlier this Wednesday.
• A sharp pullback in the US bond yields prompts some USD profit-taking and offers support.
• The prospects for more aggressive central banks, the risk-on mood could cap the XAU/USD.

Gold rebounds swiftly from its lowest level since April 2020 touched earlier this Wednesday and turns positive for the second successive day. The momentum lifts the XAU/USD to a fresh weekly high, around the $1,652 region during the early North American session.

The UK gilt yields retreat sharply after the Bank of England said it would buy bonds at whatever scale is necessary to restore orderly market conditions. The spillover effect triggers a steep decline in the US Treasury bond yields, which forces the US dollar to surrender its early gains to a new two-decade high. This turns out to be a key factor that prompts aggressive intraday short-covering around the dollar-denominated gold.

The upside potential, however, seems limited amid the prospects for a more aggressive policy tightening by global central banks, including the Federal Reserve. Investors seem convinced that the US central bank will continue to hike interest rates at a faster pace to combat stubbornly high inflation. This could act as a tailwind for the US bond yields and favours the USD bulls, which, in turn, should cap gains for the non-yielding gold.

Apart from this, a positive turnaround in the global risk sentiment - as depicted by a strong recovery in the equity markets - should keep a lid on the safe-haven XAU/USD. Even from a technical perspective, last week's breakdown below a short-term trading range supports prospects for an extension of a multi-month-old downtrend. This makes it prudent to wait for strong follow-through buying before confirming that gold has formed a near-term bottom.

Market participants now look forward to speeches by influential FOMC members, including Chair Jerome Powell. This, along with the US bond yields, will influence the USD price dynamics and provide some impetus to gold. Apart from this, traders will take cues from the broader risk sentiment to grab short-term opportunities around the XAU/USD. The fundamental backdrop, however, suggests that the intraday recovery runs the risk of fizzling out quickly.

Technical levels to watch