Gold suffers a setback as the USD and yields soar. Will the XAU/USD Price Fall?

Following a good performance earlier in the week, gold prices (XAU/USD) fell around 0.5% to $1,967 on Thursday, weighed down by soaring US bond rates and US dollar strength following better-than-expected economic data in the US.

A Department of Labor report released this morning showed that the number of Americans filing for unemployment benefits unexpectedly fell in the week ended July 15, falling to 228,000 from the previous 237,000 versus the expected 242,000, registering the lowest level since mid-May, indicating that widespread layoffs are not yet taking place.

Negative labor market statistics drove US Treasury yields on a robust climb, particularly those at the front end of the curve, strengthening the US dollar. Traders predicted that the surprising resiliency of the US economy will prompt the Federal Reserve to tighten again in the fall and maintain interest rates elevated for longer in its fight against inflation.

When the Fed announces its monetary policy decision next week, we will have more information to assess the Fed’s roadmap, but one thing is certain: if the institution indicates that more work is needed to restore price stability and signals support for additional tightening, gold could take a beating.

In anticipation of the FOMC meeting next week, the bank is expected to raise its key benchmark rate by 25 basis points to a range of 5.25% to 5.50%, the highest level since 2001. This possibility has already been largely priced in, therefore the outlook will be crucial for markets. If guidance continues hawkish, terminal rate expectations may rise, producing a hostile environment for precious metals.

Gold Technical Analysis

After failing to cross technical resistance at $1,985 earlier in the week, gold ended its rally and turned lower. This region has stalled increases on many times in May, June, and this month.

Following this rejection, XAU/USD has begun to retrace down to trendline support at $1,965, as shown on the 4-hour chart below. While prices may form a foundation around current levels before resuming their ascent, a break might increase bearish pressure, clearing the door for a slide towards $1,945, then $1,935.

If, on the other hand, buyers retake control of the market and cause a bullish reversal, initial resistance occurs at $1,973 and then at $1,985, as previously mentioned. Successfully breaking through this resistance level might restart upward momentum, laying the groundwork for a rally toward the psychological $2,000 level, which also corresponds to the 61.8% Fib retracement of the May/June selloff.