Gold Price Forecast: XAU/USD bulls move in to test critical resistance but bears are ready to pounce

• Gold bulls have been taking control due to a weaker US dollar.
• The price is trapped between daily support and resistance but the W-formation could hamstring the bulls.
• If there is a break, the price imbalances to $1,883 on the upside and $1,780 to the downside could be mitigated. 

At $1,842.80, the gold price is higher on Thursday by some 1.45% and the US dollar is pressured, dipping to a 2-week low, as measured by the DXY index. The greenback is extending its pullback from a two-decade high and fared poorly against riskier currencies, trading down 1.04% at 102.82, near to the lows of the day and its lowest since May 5 at 102.657.

The index hit a near two-decade high last week as a hawkish Federal Reserve and growing worries about the state of the global economy helped lift the greenback to score some 7.5% higher for the year so far. However, Fed officials remain hawkish.

Steadfastly hawkish Fed to contain gold bulls

The Fed chairman's comments during an interview with the Wall Street Journal were the most hawkish yet and these were accompanied by Fed's Charles Evans on Wednesday saying that the Fed will likely hike rates above neutral. 

“If we go 50 bp beyond that, if we go 75 bp beyond that, then that restrictive setting of policy should be working to bring inflation down.” Evans added that “my own assessment of ‘neutral’ is in the 2.25-2.5% range.”

 Fed's Patrick Harker also spoke this week and said, “we don’t want to overdo it. But we have to act and we are acting.” He added that the US may have a few quarters of negative growth, but that is not what he is forecasting. Lastly, Harker said the Fed can engineer a “safe” if not “soft” landing for the economy.  

On Thursday, Kansas City Fed’s Esther George noted that financial conditions are starting to tighten and said that it would take “something very different” to support larger rate increases. George added that she is very comfortable with 50bps rate rises.

In this regard, analysts at ANZ Bank said that while ''tighter financial conditions are of course needed to reduce demand and bring inflation down, the pace at which financial conditions have tightened may push back against a 75bps rate rise next month, unless of course the CPI and labour market data are exceptionally strong. A key question, however, is how quickly will labour demand slow?''

Meanwhile, today's weekly initial claims were showing early signs of trending higher from their record lows in March, which analysts at ANZ Bank said ''may be a very early indication that demand for labour is beginning to ease a little. But it’s early days, and with 1.9 job openings per unemployed person, the US labour market remains extremely stretched.''

''Indeed, Fed Chair Powell's willingness to take rates beyond neutral in an effort to tame inflation, while sounding tone-deaf regarding economic worries, suggests the path of least resistance for gold is still lower,'' analysts at TD Securities argued.

''ETF holdings of gold continue to fall for a tenth straight day while positioning analytics still argue for the potential of additional pain for gold bugs. Position sizing has reverted to more normal levels, the number of traders long the yellow metal remains elevated, while the breadth of traders short has just started to rise from near-record lows. While the conclusion of CTA selling could offer gold some support at the lows, we do not anticipate the yellow metal to make another leg higher in the face of a steadfastly hawkish Fed.''

Gold technical analysis

The price is trapped between daily support and resistance but the W-formation could hamstring the bulls and thus keep the price contained in a sideways channel for the days ahead. If, however, there is a break one way or the other, of the current support and resistance, then the price imbalances to $1,883 on the upside and $1,780 to the downside could be mitigated.