Gold Price Forecast: XAU/USD corrects from multi-month high, downside seems limited

• Gold witnessed some profit-taking on Friday amid signs of stability in the financial markets.
• Hopes for diplomacy in Ukraine underpinned the risk sentiment and weighed on the metal.
• The set-up still favours bulls and support prospects for the emergence of some dip-buying.

Gold struggled to find acceptance above the $1,900 mark and witnessed a pullback from the highest level since June 2021 touched earlier this Friday. The US Secretary of State Antony Blinken accepted an invitation to meet Russian Foreign Minister Sergei Lavrov late next week and raised hopes for a diplomatic solution to the East-West standoff over Ukraine. This helped the global risk sentiment to stabilize a bit, which, in turn, was seen as a key factor that undermined the safe-haven XAU/USD. The downside, however, remains cushioned amid fears of an imminent Russian invasion of Ukraine.

On Thursday, British Foreign Secretary Liz Truss dismissed Russia's claims that it is withdrawing troops and said that the buildup around Ukraine has shown no signs of slowing down. Adding to this, UK Prime Minister Boris Johnson and US President Joe Biden accused Russia of fabricating a pretext to invade Ukraine. It is worth recalling that Russian media reported on Thursday that rebels in eastern Ukraine accused government forces of shelling their territory. Ukraine, however, denied accusations, suggesting that this could be the false flag operation designed to discredit the Ukrainians.

Conversely, the Russian Ministry of Defense said that around 10 military convoys have left Crimea and released a video showing a logistics unit coming back to its base after the completion of drills. Adding to this, the latest update from US satellite image company, Maxar Technologies, showed that Russia has pulled back some equipment from the Ukraine border. The contradicting headlines should keep a lid on any optimistic move in the markets. Apart from this, uncertainty about the Fed's tightening plans could act as a tailwind for gold prices and help limit any meaningful corrective slide.

According to the minutes of the January 25-26 FOMC meeting, released on Wednesday, most policymakers agreed that it would be appropriate to remove policy accommodation at a faster pace than anticipated if inflation does not move down as they expect. Adding to this, the latest geopolitical developments seem to have dashed hopes for a 50 bps rate hike in March. This could further lend support to the non-yielding gold, warranting caution for bearish traders. Hence it will be prudent to wait for strong follow-through selling before confirming that the recent strong move up has run out of steam.

Nevertheless, the XAU/USD, for now, seems to have snapped two days of the winning streak, though remains on track to record gains for the third successive week. Market participants now look forward to the release of the US Existing Home Sales data, due later during the early North American session. This, along with the US bond yields, will influence the USD price dynamics and provide some impetus to the commodity. The focus, however, will remain on Russia-Ukraine headlines, which should continue to play a key role in driving demand for traditional safe-haven assets, including gold.

Technical outlook

From a technical perspective, this week’s strong move up confirmed a near-term bullish breakout through a downward sloping trend-line extending from June 2021. Hence, Friday’s downtick might still be categorized as a corrective pullback amid slightly overbought RSI (14) on the daily chart and is likely to find support near the $1,879-$1,877 region. Any subsequent decline could be seen as a buying opportunity. This, in turn, should help limit the slide for gold near the aforementioned trend-line resistance breakpoint, around the $1,855 zone.

On the flip side, bulls might now wait for sustained strength above the $1.900 mark before positioning for any further gains. The next relevant resistance is pegged near the $1,908-$1,910 region ahead of the 2021 high, around the $1,816 area. Some follow-through buying will reaffirm the constructive outlook and pave the way for an extension of the recent upward trajectory. 

Gold daily chart

Key levels to watch