XAU/USD remains at the mercy of US bond yields, US CPI in sight
- Gold has rebounded strongly from multi-month lows and rebounded more than 2% on Tuesday.
- Falling US bond yields led to USD profit taking and remained supportive.
- The underlying bullish sentiment has limited any further gains for the safe haven metal.
Gold saw an aggressive short-hedging move from nine-month lows and rebounded around $40, up more than 2% on Tuesday. The sharp rise marked the largest one-day rise since Jan. 4 and was sponsored by a combination of factors – lower bond yields and a weaker US dollar. Expectations that the Fed might take action to rein in the rapidly rising cost of long-term borrowing pushed US Treasury bond yields down slightly and extended some support for the non-performing yellow metal. The pullback in US bond yields prompted the dollar bulls to take some profits off the table, giving the dollar-denominated commodity an additional boost.
XAU/USD eventually settled near the upper end of its daily trading range, although there was no solid follow-on buying. The underlying bullish sentiment in financial markets proved to be a key factor limiting any further gains for the safe-haven precious metal. Global risk sentiment remained well supported by expectations that the successful deployment of the COVID-19 vaccine and massive US fiscal spending will lead to a strong rebound in the economy. The House of Representatives is expected to give final approval to a highly anticipated $1.9 trillion pandemic relief package proposed by US President Joe Biden.
Meanwhile, some investors see a real risk of an overheating US economy and higher inflation on the back of the Bide administration’s planned spending. Since gold is considered a hedge against inflation, Wednesday’s release of the US CPI report will now play a key role in influencing the short-term path. In the meantime, general market risk sentiment, USD price momentum and US bond yields will be seen as significant trading opportunities.
Short term technical outlook
From a technical perspective, the overnight rally could still be classified as a corrective rebound from oversold conditions and is likely to fizzle out fairly quickly. Therefore, any subsequent positive movement could still be seen as a selling opportunity near the $1740 region. This, in turn, should cap the upside of the product near the breakout point of strong horizontal support at $1760-65. That said, a sustained move beyond will suggests that the metal has bottomed out and sets the stage for a meaningful near-term recovery.
On the other hand, the $1700 mark now appears to be protecting the immediate downside. This is followed by support near the $1685-83 region, which if broken will be seen as a new trigger for bearish traders. XAU/USD could then accelerate the drop towards the June 2020 lows, around the $1670 level before finally falling to the next relevant support near the $1650 area.