Gold Price Forecast: XAU/USD bleeds out from key resistance, but how far can the US dollar climb?

• Gold bears move back in following a significant bullish correction.
• The US dollar is moving on on a weekly target in the DXY near 110.80. 
• The US CPI data next week will be a critical feature on the calendar ahead of the Fed. 

The gold price on Tuesday has fallen back under pressure as the New York session blasts the US dollar to the moon on the back of mixed data at the start of the session. The yellow metal fell from a one-week high amid the ongoing speculation that global banks will continue along the path of their aggressive monetary policy tightening. Gold, at the time of writing, is lower by some 0.5% at $1,700 after falling from a high of $1,726.79 to the current lows. 

The US dollar jumped on the back of the US services industry PMIs for August that have underpinned the market's opinion that the economy was not in recession last month. The DXY index, which measures the greenback vs. a basket of currencies rallied to fresh bull cycle highs of 110.553 while the Institute for Supply Management said its Non-manufacturing PMI edged up to a reading of 56.9 last month from 56.7 in July, the second consecutive monthly increase after three months of declines. The growth in services followed the ISM's manufacturing survey last week that showed US factory activity grew steadily in August, outpacing the nation's counterpart economies, such as Europe and China. 

This data, however, will come in second place to next week's US Consumer Price Index for August where the core rate will be scrutinised for signs that the Fed will hike by 75bps rather the 50bps. Fed fund futures are now pricing in a 73% chance of a 75-basis-point rate hike by the Fed at its Sept. 20-21 policy meeting.

Meanwhile, the US benchmark Treasury yields rallied to their highest levels since June on expectations that the Federal Reserve will keep hiking interest rates which have weighed on the gold price considering its strips away the opportunity cost of holding the non-yielding precious metal. 

However, analysts at TD Securities argued that ''while rates pricing now appears closer to fair, gold markets have failed to price the implications of a sustained period of restrictive interest rates.''

''Historical analogs suggest that periods in which market expectations for the real fed funds rate were above estimates of the natural rate of interest were accompanied by a persistent underperformance in gold prices. In turn, while gold prices may now have accurately captured the expected level of interest rates, they are not reflecting the implications of a sustained period of the restrictive policy,'' the analysts explained.

''Further,'' the analysts said,  'we see odds of a major capitulation event growing with every tick lower in gold prices, which 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.''

Gold technical analysis

As per the pre-open analysis, Gold, Chart of the Week: Bears eye a break of multi-decade uptrend near $1,676, it was explained that the price had since corrected from a strong sell-off on the daily timeframe and the bulls were moving which left prospects for a deeper correction over the start of the week as illustrated on the chart below:

Gold, live market update

The price was headed towards a price imbalance near $1,721 and beyond there, a 50% mean reversion comes in near $1,727 prior structure. The bears have committed to the market here and we have seen a subsequent move to the downside again. This leaves the extension of the downside probable for a retest of the 2021 lows around $1,676:

With that being said, the US dollar may struggle at this juncture, at least for the immediate future as it homes in on a 110.80 weekly level: