Gold forecast: XAU/USD falls as yields and dollar climb

• Gold forecast remains tilted slightly lower amid US dollar’s bullish trend
• ISM services PMI slightly below estimates
• XAU/USD chart points lower

 

Gold held onto its losses after the ISM services PMI came out a touch weaker than expected, although still shown solid expansion with a print of 54.0. The PMI report showed a noticeable pick up in employment in the dominant services sector while backlog of orders also rose quite strongly. This comes after a disappointing US labour market report on Friday which triggered a pullback in the US dollar. Though the weaker greenback last week gave bullion some breathing room, the overall directional bias remains tilted to the downside for the metal, despite rising about 2% last week.

 

Gold probably not out of the woods yet

 

Last week’s gain was the first weekly gain in 5 weeks. While that suggests the bearish run may have ended, it is far to early to jump into any conclusions. Indeed, it is important to keep last week’s recovery in perspective. Gold has just come through one of its weakest quarters in recent years, ending almost 30% below the record highs reached earlier in the year. Consecutive monthly declines throughout the second quarter underline how dramatically investor sentiment has shifted. Markets are increasingly focused on the prospect of higher interest rates remaining in place for longer, rather than anticipating imminent policy easing. Hence, bond yields remain supported near recent highs. Gold typically performs better when real yields are falling and monetary policy is becoming more accommodative, which is not the case right now.

 

There is not much int the way of key data releases to change the long dollar narrative much this week, although Wednesday’s publication of the June FOMC meeting minutes will offer investors a closer look at policymakers’ thinking. Markets will be particularly interested in whether Warsh’s relatively hawkish tone from that meeting reflects a broader consensus within the committee, or whether there are also signs of concern over economic momentum. Unless the minutes reveal a more dovish shift than markets currently expect, interest rate expectations are unlikely to change materially.

 

Gold’s upside potential looks limited

 

Although the last week’s employment report briefly revived hopes that the Federal Reserve may not hike rates so soon after all, the broader policy backdrop still looks challenging for gold forecast. Under new Fed Chair Kevin Warsh, the central bank has abandoned formal forward guidance, leaving investors to interpret incoming economic data for clues about future policy. While that has increased market uncertainty, it has also reinforced the idea that interest rates could remain elevated for an extended period if inflation refuses to ease.

 

Elevated Treasury yields increase the opportunity cost of holding a non-yielding asset, while a resilient US dollar should also cap any short term rallies. The recent dollar weakness helped fuel the latest recovery, but unless the currency enters a more sustained downtrend, this could prove to be little more than a temporary relief rally.

 

That said, there are still supportive longer-term factors for gold. Central banks continue adding to their gold reserves as they diversify away from US dollar assets, providing an important source of structural demand. However, geopolitical risks have become less influential following the agreement between the US and Iran to reopen the Strait of Hormuz. As safe-haven demand fades, investor attention has shifted back towards economic data and central bank policy.

 

Technical gold forecast and levels to watch

 

From a technical analysis perspective, gold has shown some encouraging signs over the past couple of sessions – yet I am not convinced. While prices have now managed to record several consecutive daily closes above the psychologically important $4,000 level, the metal remains in a technical downtrend with lower lows and lower highs.

 

 

So, at this stage, I still view the latest advance on XAUUSD as a counter-trend rally within a broader bearish market structure.

 

The most important short term resistance to watch sits around the $4,195-$4,200 region, where, as we have seen already today, a descending trendline continues to act as significant resistance. A decisive break above that area would improve the technical outlook considerably and increase confidence that the recent correction has finally run its course.

 

On the downside, the $4,100 support area remains crucial, or more generally the $4,098-$4,136 zone highlighted on the chart. A move back beneath this region would quickly shift the near-term gold direction back towards the downside. More importantly, a daily close below $4,000 would likely attract fresh selling pressure and reinforce the longer-term bearish trend.

 

For now, I remain neutral-to-slightly-bearish on the gold forecast from a technical standpoint. The recent recovery is constructive, but it has not yet provided enough evidence to abandon my broader cautious view.

 

 

-- Written by Fawad Razaqzada, Market Analyst

 

Follow Fawad on Twitter @Trader_F_R