Gold Price Forecast: XAU/USD recovers further from two-month low, upside seems limited

• Gold gained some positive traction on Wednesday, though lacked follow-through buying.
• The USD languished near a one-week low amid sliding US bond yields and extended support.
• Hopes for peace in Ukraine remained supportive of the risk-on mood and should cap gains.

Gold built on the overnight solid rebound from the 50-day SMA support, around $1,890 region, or over a two-month low and gained some positive traction during the first half of the trading on Wednesday. The XAU/USD held on to its modest gains through the early European session and was last seen trading just above the $1,925 level, up around 0.75% for the day. The US dollar languished near a more than one-week low amid some follow-through buying around the shared currency, bolstered by hopes for a breakthrough in the Russia-Ukraine peace negotiations. Apart from this, the ongoing retracement slide in the US Treasury bond yields undermined the greenback and extended some support to the dollar-denominated commodity.

That said, any meaningful recovery still seems elusive amid the latest optimism about a diplomatic solution to end the war in Ukraine. In fact, the Russian Defense Ministry promised to scale down military activity in Kyiv and Chernihiv to create conditions for dialogue. Adding to this, top Russian negotiator Vladimir Medinsky was quoted saying that there have been enough developments to hold a meeting between President Vladimir Putin and his Ukrainian counterpart Volodymyr Zelenskyy. Moreover, acceptance that the Fed would adopt a more aggressive policy stance and deliver a 50 bps rate hike at the next two policy meetings should further collaborate to cap gains for the non-yielding gold.

Investors might also refrain from placing aggressive bets ahead of important US macro data, starting with the release of the ADP report and the final Q4 GDP print later this Wednesday. This will be followed by the Fed's preferred inflation gauge, the Core PCE Price Index on Thursday. The focus, however, will remain on Friday's closely watched US monthly jobs report - popularly known as NFP. This will play a key role in influencing the near-term USD price dynamics. Apart from this, fresh developments surrounding the Russia-Ukraine saga should assist investors to determine the next leg of a directional move for gold prices.

Technical outlook

From a technical perspective, the XAU/USD, so far, has been showing some resilience below the $1,900 round-figure mark. The overnight bonce from a technical support favours bullish traders, though the lack of follow-through buying warrants some caution. In the meantime, any further move up is more likely to confront stiff resistance and remained capped near the $1,944-$1,945 region. The next relevant hurdle is pegged near the $1,956-$1.957  area, which if cleared decisively will reaffirm a near-term positive bias for gold prices.

On the flip side, the $1,914 area now seems to protect the immediate downside. Any meaningful slide below might continue to find decent support near the $1,895-$1,890 region, which should act as strong base for gold. A convincing breakthrough the latter would set the stage for an extension of the recent sharp pullback from the vicinity of the all-time high, around the $2,070 region touched earlier this month. 

Gold daily chart

Key levels to watch