Gold (XAU/USD) has been unable to hold bullish momentum going into Tuesday’s session after recovering from the worst drop since August 2020 last week. The Fed’s acknowledgment regarding inflationary pressures has served to prove that gold isn’t so much a hedge against inflation but rather a hedge against Central Bank inaction.

This week is full of Fed speeches and markets are likely to be paying close attention. With Powell due to speak this afternoon, Kaplan, Bullard, and Williams stayed on script yesterday and reiterated that inflation is expected to be transitory, given how current price pressures are mostly driven by the reopening of the economy and that there is still room for more recovery before a stimulus is withdrawn. If Powell sticks to this narrative much longer, market participants may start to believe that he is making the mistake of being too dovish for too long, which would be a good thing for gold prices.

Alternatively, a more hawkish Fed going forward is likely to keep gold prices under pressure. US Dollar price action has been key for XAU/USD performance and there is still bullish momentum in the Dollar Index (DXY) despite last week’s surge seeming overextended, which is causing gold to retreat again this morning.

XAU/USD Daily chart

Source: Refinitiv

Friday’s pullback came to rest at a previous area of key support between 1,762 and 1,755, which served as a bottom for the extension seen in April. Today’s pullback may find further support at the 23.6% Fibonacci (1,770) as the stochastic oscillator is showing strong oversold conditions after last week’s drop. If both levels are invalidated then we are likely faced with a wider retracement and change in long-term momentum, which could see XAU/USD fall below 1,700 in the coming weeks. A key area to look out for before that happens is 1,720, which could still offer buyers some support.

On the flipside, if bullish momentum consolidates, I would expect to see some short-term resistance between 1,795 and 1,803, followed by the 38.2% Fibonacci at 1,827.