Gold Price Forecast: XAU/USD hits three-week low amid surging bond yields, stronger USD

• A combination of factors drags gold to a fresh three-week low on Wednesday.
• Hawkish Fed expectations, rising US bond yields, stronger USD exert pressure.
• The risk-off impulse could lend some support and help limit any further losses.

Gold continues losing ground through the early North American session and hits a fresh three-week low, around the $1,630 area in the last hour. The downtick is exclusively sponsored by a strong pickup in demand for the US dollar, which tends to weigh on the dollar-denominated commodity.

In fact, the USD Index, which measures the greenback's performance against a basket of currencies, has now recovered a major part of its weekly losses amid rising bets for aggressive rate hikes by the Fed. The US central bank remains committed to bringing inflation under control and is expected to deliver another supersized 75 bps rate increase at the next policy meeting in November.

Hawkish Fed expectations trigger a fresh leg up in the US Treasury bond yields and continue to act as a tailwind for the buck. In fact, the yield on the rate-sensitive 2-year US government bond rallies to a new 15-year peak and the benchmark 10-year Treasury note hit its highest level since 2008. This is seen as another factor driving flows away from the non-yielding gold.

The USD maintains its strong bid tone and seems rather unaffected by mixed US housing market data. This, along with rising bets for a jumbo rate hike by the European Central Bank and the Bank of England, suggests that the path of least resistance for the XAU/USD is to the downside. Hence, a slide back towards the YTD low, around the $1,615 area, remains a distinct possibility.

That said, a turnaround in the global risk sentiment - as depicted by a generally weaker tone around the equity markets, could lend support to the safe-haven gold. That said, any attempted recovery might still be seen as a selling opportunity and runs the risk of fizzling out rather quickly.

Technical levels to watch