Gold Price Forecast: XAU/USD at crossroads ahead of US Services PMI

Gold price rallied in the first half of the trading week, breaking out of a bearish trend that had dominated XAU/USD price action for most of February. This recent surge was halted early on Thursday as US Treasury bond yields gathered strength and supported the US Dollar. Gold traders now await more Federal Reserve clues, which could come from Fed officials' speeches and Friday's ISM Services PMI.

In the meantime, investors are watching the US Treasury bond yields, which in the case of the benchmark 10-year bond, have seen a rally past the 4% resistance and is nearing levels not seen since last October. Due to the inverse correlation of Gold price with the US Treasury yields, this could provide further downward pressures on XAU/USD.

Gold news: ISM Manufacturing PMI mixed, soft US Consumer Confidence

Earlier in the week, soft data from the United States, led by decreasing inflation expectations in the CB Consumer Confidence report released on Tuesday, triggered some profit-taking on the US Dollar longs, as the reading might somewhat ease the pressure on the Federal Reserve to increase its interest rate hike path again. This was followed on early Wednesday by higher-than-expected Purchasing Managers Index (PMI) readings in China, which improved the market mood in Asia.

The Institute of Supply Management (ISM) released on Wednesday its Manufacturing PMI report on Wednesday with mixed results. While the headline number slightly disappointed (47.7 vs 48 expected) and remained in contraction territory, and the employment sub-index also fell below 50 (49.1 vs 51 expected), the ISM Manufacturing Prices Paid number jumped out from 44.5 to 51.3, way above the 45 consensus expectation. The latter number is the one that indicates how businesses identify inflation expectations, which are still at the front of Federal Reserve officials' minds. Gold price retraced a bit but stayed in the green after the release. 

United States Services PMIs on the way, watch for inflation clues

The Institute of Supply Management (ISM) will publish the Services PMI on Friday at 15 GMT. If this report reaffirms that rising wage costs are feeding into accelerating price pressures in the sector, the US Dollar is likely to hold its ground against Gold. Hence, the Prices Paid Index component will be watched closely by market participants.

It's worth noting, however, that the CME Group FedWatch Tool shows that markets are fully pricing in at least two more 25 basis points Federal Reserve rate hikes in March and May. Additionally, the probability of the Fed holding the policy rate unchanged in June stands at 25%.

The market turnaround has confirmed that the US Dollar does not have a lot of room on the upside, at least until the February jobs report and inflation data confirm or refute one more 25-bps hike in June.

Gold price sellers remain hopeful

Anil Panchal, News Editor at FXStreet, looks at the Gold price technical picture from the bears point of view:

Gold price stays depressed after reversing from a three-week-old horizontal resistance area, around $1,844-48. The pullback moves also coincide with the RSI (14) retreat from the overbought territory and bearish MACD signals to keep XAU/USD sellers hopeful.

However, a convergence of the 200 and 50 Simple Moving Averages (SMAs), near $1,827 by the press time, appears to be the key support to challenge the metal’s further downside.

Even if the quote drops below the $1,827 SMA confluence, the previous resistance line from February 09, close to $1,817, can act as the last defense of the Gold buyers.

Gold price: Mining developments and supply-side dynamics

Even if the demand side is usually much more impactful on Gold price than the supply one, the other side of the market dynamics is also worth tracking. Gold output from across the Americas is likely to grow in 2023 as existing mining projects in North America keep expanding. Some of the Gold price downtrend in the latter part of 2022 can be attributed to the rising supply. 

But to keep up with this surge in activity, mining companies also had to cope with surging inflation raising the costs of mining operations around the world, which was a factor supporting the Gold price. The disinflation process forecast for 2023, as central banks keep tightening their monetary policies to combat inflation, should have a particular bearish effect on Gold price the extent of which will probably be limited, or at least secondary compared to demand-side speculative interest forces.

Gold price in 2023: Up-and-down action

Financial markets have been a two-tale story for the early part of 2023, in which Gold price has reflected in its price action like no other asset. XAU/USD rode an uptrend during all of January with the market optimism about inflation slowing down and constant Federal Reserve dovish talk, only to see a drastic turnaround back to the old dynamics in February after a hot US Nonfarm Payrolls (NFP) report. The US economy adding more than 500K jobs in the month of January shifted the market expectations for the Fed easing its monetary policy, and the US Dollar has come back to the market King throne.

Gold price opened the year at $1,823.76 and reached a year-to-date high of $1,960 on February 2, right in between the first Federal Reserve meeting of the year and the surprising release of the US jobs report for January. Gold price went on a big downtrend from there, reaching year-to-date lows just above $1,800, where it found support. 

Gold price daily chart