Gold Price Forecast: Limited upside potential for XAU/USD ahead of FOMC minutes on Wednesday

• Gold dropped to a one-week low on Monday amid strong follow-through USD buying.
• Hawkish Fed expectations and elevated US bond yields continue to underpin the buck.
• Recession fears offer support to the safe-haven XAU/USD ahead of the FOMC minutes.

Gold struggled to capitalize on its recent strong gains recorded over the past four weeks or so and witnessed heavy selling on Monday. The sharp downfall dragged spot prices to a one-week low and was sponsored by broad-based US dollar strength, which tends to undermine the dollar-denominated commodity. Despite last week's softer US CPI report, Fed officials stressed that it is too soon to declare a victory on inflation and have maintained a hawkish tone. This, in turn, suggested that the Fed would stick to its policy tightening path and remained supportive of elevated US Treasury bond yields, offering support to the greenback.

The USD bulls seemed rather unaffected by an unexpected slump in the Empire State Manufacturing Index to -31.3 in August from 11.1 in the previous month. The 42 points decline was the second largest monthly fall on record. This comes on the back of the disappointing Chinese macro data released earlier on Monday and further fueled recession fears, which, in turn, helped limit the downside for the safe-haven gold. The XAU/USD stalled its intraday decline just ahead of the $1,770 area and edged higher during the Asian session on Tuesday. Any meaningful upside, however, seems elusive ahead of the FOMC minutes on Wednesday.

The markets are currently pricing in a greater chance of at least a 50 bps rate hike at the September FOMC meeting. Hence, the minutes would be looked upon for clues about the possibility for a larger 75 bps move. This would play a key role in influencing the near-term USD price dynamics and provide a fresh directional impetus to the non-yielding gold. Apart from this, investors would take cues from the US monthly Retail Sales data, also scheduled for release on Wednesday. The fundamental backdrop makes it prudent to wait for strong follow-through buying before positioning for any further appreciating move for the metal.

Technical Outlook

From a technical perspective, repeated failures to find acceptance above the $1,800 mark warrants some caution for bullish traders. That said, the emergence of some dip-buying, along with bullish oscillators on the daily chart, supports prospects for further gains. Any further move up, however, might now confront resistance near the $1,788-$1,789 region. This is followed by the aforementioned handle and last week's swing high, around the $1,808 area. Some follow-through buying would mark a breakout and lift gold towards the next relevant hurdle near the $1,824-$1,825 region.

On the flip side, the overnight swing low, around the $1,772 area now seems to protect the immediate downside. Sustained weakness below would expose the $1,754-$1,752 strong resistance breakpoint, now turned support, which should now act as a key pivotal point. A convincing breakthrough the latter would shift the bias in favour of bearish traders and drag gold towards the $1,728 intermediate support en route the $1,715 zone.