Gold forecast: XAU/USD rally remains vulnerable amid oil uncertainty

Gold prices recovered in the first half of Friday’s session after yesterday’s decline, helped by another batch of softer US economic data. The rebound could lose momentum however as oil prices pushed higher ahead of the weekend. That leaves gold at an interesting juncture. The metal surged last week after spending several weeks consolidating around the $4,000 level, prompting the obvious question: was the move the beginning of a fresh uptrend, or simply a powerful rebound within a broader period of consolidation or a bear trend? So far this week, we have seen a bit more upside in a choppy trade. For now, I remain cautious about calling the start of another major leg higher.

 

Gold forecast: Softer US data hasn’t weighed on bond yields

 

The fundamental backdrop became somewhat more supportive for gold in the last few weeks. Last week’s disappointing payrolls figures were followed this week by broadly in-line inflation data, weaker retail sales and softer consumer sentiment. Taken together, those releases suggest that momentum in the US economy may be fading. That, in turn, has strengthened expectations that the Federal Reserve could leave interest rates unchanged at its September meeting.

 

While the dollar has weakened, bond yields have remained elevated, however. This is a major source of market risk which is now becoming increasingly difficult to ignore – not just for gold and other zero and low yielding assets, but for stock markets, too.

 

Oil is once again the market’s biggest variable

 

With this week’s data out of the way, the focus remains fully the Middle East and the outlook for crude. Oil prices fell on Thursday, offering some relief, but they have since rebounded.  There has been little meaningful progress towards reviving the previous US-Iran agreement, while uncertainty surrounding the Strait of Hormuz continues to represent a significant threat to global energy markets. Comments from US Treasury Secretary Scott Bessent, who said Washington would pursue unprecedented measures against Iran as part of its maximum-pressure campaign, have certainly not helped.

 

This is where the recent gold rally becomes more complicated. While CPI was weaker, there was roughly a 20% gain in oil prices in July. If oil prices remain elevated, there is a clear risk that inflation could re-accelerate. Higher energy prices would make it harder for the Fed to ease policy, while potentially pushing bond yields and the dollar higher — both of which would represent headwinds for gold.

 

Gold needs to clear a major resistance zone

 

From a technical analysis perspective, gold now faces an important test here.

 

 

Resistance is concentrated around the $4,365-$4,455 region. The metal has tested this area several times this week but has so far failed to break decisively above it. The zone is particularly significant because it brings together a previous swing low and an area that has shifted from support to resistance.

 

On the downside, initial support is located around $4,300-$4,305, followed by $4,200. Below that, the more important level sits around $4,100-$4,120, close to the base of last week’s breakout.

 

A sustained break above the $4,365-$4,455 resistance area would strengthen the case that the latest rally represents more than a temporary rebound. Failure to clear it, particularly alongside renewed strength in the dollar and oil, would leave the broader consolidation argument intact.

 

The bullish case still needs confirmation

 

Gold remains one of the clearest potential beneficiaries of a more dovish shift in US monetary policy. Last week’s surge demonstrated just how quickly the metal can respond when dollar and rate expectations move in its favour.

 

The question is whether buyers can maintain that momentum.

 

Some consolidation following such a powerful advance was hardly surprising. What is less encouraging is that gold has struggled to generate a more convincing follow-through this week, suggesting that momentum may already be fading. However, it hasn’t sold off immediately either, so there is that too.

 

More importantly, the market probably needs another run of softer US economic data to turn the latest rebound into a durable bullish trend.

 

For now, the fundamental picture has improved modestly for gold, but the upside remains vulnerable. Unless Treasury yields weaken, the metal may struggle to sustain a move beyond its current resistance zone.

 

 

 

 

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R