Gold Price Forecast: XAU/USD drops to near two-week low, around $1,925 region

• Gold lost ground for the third straight day and dropped to over a one-week low on Tuesday.
• Hopes for diplomacy in Ukraine undermined the safe-haven metal amid surging US bond yields.
• Expectations for the start of the policy tightening by the Fed should now act as a headwind.

Gold extended its recent sharp pullback from the vicinity of the all-time high, around the $2,070 area touched last week and witnessed heavy selling for the third successive day on Tuesday. This also marked the fourth day of a negative move in the previous five and dragged spot prices to a one-and-half-week low, around the $1,925 region in the last hour. Hopes for progress in the Russia-Ukraine ceasefire talks and a diplomatic solution to end the war dampened the precious metal's safe-haven appeal. In fact, Russian and Ukrainian delegations held the fourth round of negotiations on Monday and the discussions are due to resume on Tuesday.

Adding to this, the recent strong rally in the US Treasury bond yields was seen as another factor driving flows away from the non-yielding XAU/USD. The markets seem convinced that the Fed will confirm an imminent start of the policy tightening cycle and hike its target funds rate to combat stubbornly high inflation. This, in turn, pushed the yield on the benchmark 10-year US government bond to its highest level since June 2019. Hence, the market focus will remain on the outcome of a two-day FOMC monetary policy meeting, scheduled to be announced on Wednesday. This will influence the USD in the near term and provide a fresh impetus to the dollar-denominated gold.

In the meantime, traders will take cues from the incoming geopolitical headlines amid the risk of a further escalation in the Russia-Ukraine conflict. In fact, Russia attacked a large Ukrainian base near the border with NATO member Poland on Sunday. Adding to this, a Kremlin spokesperson said on Monday that all the plans of Russia in Ukraine will be fulfilled in full and in the time frames outlined. The data, however, might do little to provide any meaningful impetus as investors are likely to keep a close eye on fresh developments surrounding the Russia-Ukraine saga.

Technical outlook

From a technical perspective, the XAU/USD has now dropped to the 50% Fibonacci retracement level of the $1,780-$2,070 strong move up to the multi-year high. Some follow-through selling will suggest that the markets have already started looking past the initial shock at Russia’s invasion of Ukraine and set the stage for further losses. Gold could then accelerate the decline towards testing sub-$1,900 levels - support marked by the 61.8% Fibo. level. This is followed by support near the $1,875 region, which if broken decisively will shift the near-term bias in favour of bearish traders.

On the flip side, the $1,948-$1,950 region now seems to act as an immediate resistance ahead of the 38.2% Fibo. level, around the $1,960 area. Sustained strength beyond has the potential to push gold back towards the key $2,000 psychological mark. The latter coincides with the 23.6% Fibo. level, above which the metal seems all set to resume its upward trajectory and jump towards the next relevant hurdle near the $2,048-$2,050 region.

Gold daily chart

Key levels to watch