XAU/USD Fundamental Backdrop

Yesterday’s Federal Open Market Committee (FOMC) minutes propelled the U.S. dollar higher while spot gold continues to lack directional conviction. A robust labor market and solid growth data give a string foundation for the Fed to be aggressive in its fight with inflationary pressures. Details around balance sheet reduction bid the dollar higher and look to be the trend short-term at a minimum.

A slump in crude oil prices has added to gold’s woes after additional sanctions on Russia hurt supply-side inputs. A saving grace for bullion comes via the safe-haven demand for the yellow metal as hesitation in Ukraine continues.

U.S. real yields (see 10-year below) have added support for gold as they have taken a step lower thus reducing the opportunity cost of holding gold – traditionally an inverse relationship between the price of gold and real yields.

U.S. 10-Year Real Yield

(Click on image to enlarge)

Source: Refinitiv

Economic Calendar

With the week unlikely to bring much via macroeconomic data, next week (refer to the economic calendar below) could give gold the push it needs to break out from its current consolidatory pattern. Naturally, the focus will shift to U.S. inflation data with a higher print potentially favoring gold upside. As has been the case recent, geopolitics will persist in influencing gold prices.

Source: DailyFX Economic Calendar

Technical Analysis

Gold Price Daily Chart

(Click on image to enlarge)

Chart prepared by Warren Venketas, IG

The narrowing form created by the daily candles above keeps gold prices within the medium-term rectangle pattern (blue). A fundamental catalyst is required to liberate gold from the confines of the rectangle which I do not foresee this week unless unforeseen events from Ukraine sway current market sentiment.

Resistance levels:

• 2000.00
• 1966.23
• 20-day EMA (purple)

Support levels:

• 50-day EMA (blue)
• 1900.00

Cautious IG Client Sentiment

IGCS shows retail traders are currently distinctly LONG on gold, with 76% of traders currently holding long positions (as of this writing). At DailyFX we typically take a contrarian view to crowd sentiment however, due to recent changes in long and short positioning a mixed bias is preferred.