Gold Price Forecast: XAU/USD bears move in as the focus stays with the Fed

• Despite a firmer dollar, technically, gold bulls are eyeing the prospects of a move toward the prior lows in a 50% mean reversion.
• The focus remains on the global central banks as the US dollar and Treasury yields continue to dictate the show

The gold price came under some pressure at the start of the week, down some 0.20% after falling from a high of $1679 to a low of $1,659 on the day and near a 29-month low scored on Friday. The US dollar and Treasury yields continue to dictate the show as traders remain in anticipation of the Federal Reserve this week and expect the US central bank to deliver a steep interest rate hike when it meets this week.

The sentiment surrounding surging inflation and tighter monetary policy continues to strip the opportunity cost of holding zero-yield precious metals. At the same time, the greenback remains close to two-decade highs, making greenback-priced bullion more expensive for overseas buyers. The dollar index DXY which measures the currency against six counterparts, was up 0.4% at 109.98, not far from 20-year high of 110.79 hit on September. 7.

Risk-off sentiment is also contributing to a higher US dollar in the face of the aggressive tightening path that global banks are on as they try to contain uncomfortably high inflation. A slew of central banks will meet this week and Fed funds futures have priced in a 79% chance of a 75-basis-point rate hike this week and a 21% probability of a 100-basis-point increase at the conclusion of the Fed committee's two-day policy meeting.

Meanwhile, analysts at TD Securities said they ''expect continued outflows from money managers and ETF holdings to weigh on prices, which ultimately raises the probability of a pending capitulation from the small number of family offices and proprietary trading shops who hold complacent length in gold.''

''The persistence of inflation continues to support an aggressive effort by the Fed, and we now expect the FMOC to raise the target rate by 75bp at its meeting next week, deliver another 75bp hike in November, and hike a further 50bp in December. In this context, while prices are certainly weak, precious metals' price action could still have further to fall as the restrictive rates regime is set to last for longer.''

Gold Monthly chart

Gold is on the verge of a key breakout as per the monthly chart above However, if the bulls move in before the month is out, we could be looking at an equally significant recovery and a correction that brings up the following prior lows into focus as potential resistances:

Gold, daily chart

From a daily perspective, the M-formation is laying out with bulls moving in and eyeing the prospects of a move toward the prior lows in a 50% mean reversion.