US Dollar strength weighs on Gold price

Gold is struggling to capitalise on Friday’s modest rise from the $1.970 region and is coming under selling pressure on the first day of the new week. The XAU/USD pair is trading around the $1.977 level during the Asian session, remaining within striking distance of a two-week low reached last Wednesday.

The prospect of further monetary tightening by the U.S. Federal Reserve (Fed) is helping the U.S. dollar to see some buying on Monday, which in turn is seen as the main factor pulling gold prices lower for the second day in a row. Markets now seem convinced that the Fed will continue to raise interest rates to curb high inflation in the U.S. and have fully priced in a 25 basis point hike at the next Federal Open Market Committee (FOMC) meeting in May. Moreover, Fed funds futures suggest a low probability of another rate hike in June.

False expectations from the Federal Reserve are supporting the USD

Bets were boosted by recent hawkish remarks from several Fed officials and incoming positive U.S. macro data, which suggested that the world’s largest economy remains resilient. The flash version of S&P Global’s PMI survey showed Friday that overall U.S. private sector activity expanded at a faster pace in April. Service sector activity grew for the third straight month and at the fastest pace in a year, while the U.S. manufacturing indicator moved into expansion territory for the first time since October 2022.

Weaker risk appetite supports safe haven XAU/USD

The weaker trend in U.S. government bond yields keeps USD bulls from making aggressive bets and supports gold prices. In addition, a renewed downward move in equity markets is helping to further limit the downward trend in the precious metal. Prospects of further monetary tightening by the Fed are fueling concerns of economic headwinds due to rising borrowing costs, which in turn is dampening investor appetite for riskier assets and boosting demand for traditional safe-haven assets, including the XAU/USD.

There is no market-moving economic data due for release from the US on Monday, leaving the USD at the mercy of US bond yields. That being said, traders will be looking to the overall risk sentiment to take advantage of short-term opportunities in gold prices. However, given the above fundamental backdrop and the lack of significant buying, the path of least resistance for the XAU/USD is likely to be down.

From a technical perspective, bearish traders may now wait for follow-through selling below the $1,969 region before positioning for an extension of the recent retracement slide from the one-year high. Gold could then slide towards the next relevant support in the $1,956-$1,955 area before eventually falling back to the one-month low in the $1,950 area.