Gold Prices Crushed by Resurgent Yields & Strong Dollar, Bullish Outlook in Peril

GOLD PRICES FORECAST:

• Gold prices (XAU/USD) fall for the third straight day, reaching their lowest point since early April
• U.S. dollar strength and rising U.S. yields are the primary bearish drivers for the precious metal
• This article looks at XAU/USD’s key technical levels to watch in the near term

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Gold prices suffered a major setback on Thursday, falling for a third consecutive session and reaching their lowest level since the beginning of April. In early afternoon trading in New York, XAU/USD was down 1.4% to $1,960, dragged down by U.S. dollar strength and rapidly rising bond yields following encouraging macro data and news that the U.S. Congress is making progress in negotiations to raise the debt ceiling.

Focusing on today’s catalysts, unemployment claims corresponding to the previous week and the Philadelphia Fed’s manufacturing production for May were much less negative than anticipated, reinforcing the view that business activity remains remarkably resilient despite numerous headwinds, such as tightening lending standards, sticky inflation and non-stop recession talk in financial media.

With the economy holding up better than expected, the market is gradually pricing out the aggressive easing that had been discounted for the second half of 2023 in the immediate aftermath of the U.S. banking sector turmoil that erupted in March. Although with some qualms, it seems traders are starting to position for a “higher for longer” interest rate regime again, a key risk for precious metals.

Optimism over the prospect of an agreement to raise the U.S. borrowing cap and avoid a federal default also appeared to hurt safe-haven assets, including gold. For context, sentiment took a turn for the better after House Speaker Kevin McCarthy said that the lower chamber of Congress could vote on a deal as soon as next week, a sign that discussions are moving in the right direction.

Although fundamentals remain somewhat constructive for gold, the situation could change. For example, if the U.S. economy manages to stabilize and dodges a recession, rates could remain elevated for longer than initially contemplated. This scenario would undercut non-yielding assets, boosting the U.S. dollar in the process. For this reason, traders should keep a close eye on incoming data in the weeks and months ahead.

GOLD PRICES TECHNICAL ANALYSIS

After breaking below cluster support at $1,975, gold prices accelerated their retreat, falling to their weakest point in more than a month on Thursday.

While the recent decline seems to be a corrective move within a medium-term uptrend, the outlook could turn negative if bears manage to keep the pressure on the market.

In the event of a larger pullback, initial support appears near $1,920, the lower limit of a rising channel in play since September of last year. Bulls do not want to see prices breach this floor, otherwise sellers could make a try on $1,895, the 38.2% Fib retracement of the September 2022/May 2023 rally.

On the flip side, if bulls regain control of the price action and spark a rebound, technical resistance lies at $1,975, followed by the psychological $2,000 mark.

GOLD PRICES TECHNICAL CHART

Gold Prices Chart Created Using TradingView