Gold Price Forecast: XAU/USD remains stuck in range around $1785 ahead of US ISM

• Gold gained some positive traction on Monday and moved away from over one-week lows.
• Worries about the risk of stagflation turned out to be a key factor that benefitted the metal.
• The uptick lacked bullish conviction heading into this week’s key central bank event risks.

Update: Gold price is moving back and forth within a $10 range, lacking any clear directional bias amid holiday-thinned market conditions. The US dollar is holding the fort near two-week highs against its main competitors amid hawkish Fed’s expectations, reflective of the strengthening Treasury yields. Technically, gold price is wavering between the 100 and 50-Daily Moving Averages (DMA) so far this Monday, awaiting the US ISM Manufacturing PMI release for fresh trading impetus. The main event risk, however, this week remains the Fed monetary policy decision due on Wednesday.

Read: The Week Ahead: Four central banks and the US Jobs Report

Gold edged higher during the early part of the trading action on Monday and moved away from over one-week lows touched in the previous session, albeit lacked any follow-through. Data released on Friday showed that the Fed's preferred inflation gauge – the Core PCE Price Index – held steady near 30-year highs, suggesting that consumer cost pressures are getting entrenched. This validated expectations that the Fed would be forced to adopt a more aggressive policy response to contain stubbornly high inflation and weighed heavily on the non-yielding yellow metal. Apart from this, a strong pickup in the US dollar demand exerted additional pressure on the dollar-denominated commodity and contributed to Friday's sharp intraday decline.

Meanwhile, fears about a faster-than-expected rise in inflationary pressures, along with signs of a global economic slowdown have been fueling concerns about the risk of stagflation. This, in turn, was seen as a key factor that assisted the safe-haven XAU/USD to find some support ahead of the $1,770 level and gain some positive traction on the first day of a new week. That said, a modest USD strength kept a lid on any meaningful upside for gold, at least for the time being. Investors also seemed reluctant to place fresh bets, rather might prefer to wait on the sidelines heading into this week's key central bank event risks. The Reserve Bank of Australia will hand down its policy update on Tuesday, while the Fed and the Bank of England are scheduled to announce their decisions on Wednesday and Thursday, respectively.

Despite the RBA’s dovish stance, saying that conditions for a rate hike are unlikely to be met before 2024, the money markets have priced in three hikes by the end-2022. Moreover, market players seem convinced that the Fed would be forced to adopt a more aggressive policy response to contain stubbornly high inflation. Investors have also been betting on the prospects for an imminent BoE rate hike move by the end of this year. Hawkish central bank outlooks should continue to act as a headwind for gold, warranting some caution for bullish traders. This makes it prudent to wait for a strong follow-through buying before positioning for any meaningful appreciating move. Market participants now look forward to the release of the US ISM Manufacturing PMI for some impetus later during the early North American session.

Technical outlook

From a technical perspective, repeated failures near the $1,810-12 resistance zone and the subsequent fall on Friday suggests that the recent positive move has run out of steam. This might have already set the stage for a slide towards testing the $1,762 support area. The corrective pullback from multi-week tops could further get extended towards October monthly swing lows, around the $1,745 area.

On the flip side, any meaningful recovery now seems to confront stiff resistance near the $1,790-92 region (100/200-day SMAs confluence) and remain capped near the $1,800 mark. A sustained strength beyond could allow bulls to make a fresh attempt to clear the $1,810-12 barrier and push gold prices towards the $1,832-34 heavy supply zone.

Levels to watch