Gold Price Forecast: XAU/USD slides to one-week low, downside seems limited amid Ukraine crisis

• Gold dropped to over a one-week high on Monday and was pressured by a combination of factors.
• The risk-on impulse undermined the safe-haven commodity amid elevated US Treasury bond yields.
• Weaker USD, the Russia-Ukraine conflict could act as a tailwind for the XAU/USD ahead of the Fed.

Gold came under some renewed selling pressure on the first day of a new week and dropped to over a one-week high, around the $1,955 region during the mid-European session. This marked the third day of a negative move in the previous four sessions and was sponsored by a combination of factors. Hopes for a diplomatic solution boosted investors' confidence and triggered a fresh wave of the global risk-on trade. This, in turn, undermined demand for traditional safe-haven assets and exerted some downward pressure on the XAU/USD amid elevated US Treasury bond yields.

The markets turned optimistic after Russia and Ukraine gave their most upbeat assessments over the weekend negotiations. In fact, Ukrainian negotiator Mykhailo Podolyak said that Russia is already beginning to talk constructively and that we will achieve some results in a matter of days. Adding to this, a Russian delegate to the talks, Leonid Slutsky noted that they had made significant progress and the delegations could soon reach draft agreements. This comes on the back of Russian President Vladimir Putin's remarks that there are positive shifts in talks with Ukraine.

Meanwhile, the recent monster rally in commodity prices following Russia's invasion of Ukraine has raised worries about a major inflationary shock and fueling hawkish Fed expectations. The markets have fully priced in the prospects for an imminent start of the policy tightening by the Fed and lifted the yield on the benchmark 10-year US government bond to a near one-month high. This further contributed to driving flows away from the non-yielding yellow metal, though the emergence of some intraday US dollar selling could act as a tailwind for the dollar-denominated gold.

Moreover, the market sentiment remains fragile amid concerns about a further escalation in the Russia-Ukraine conflict. In the latest developments, reports indicated that Russia attacked a large Ukrainian base near the border with NATO member Poland on Sunday. Adding to this, a Kremlin spokesperson said on Monday that all the plans of Russia in Ukraine will be fulfilled in full and in the time frames outlined. The spokesman added that the US and the EU are trying to tempt Russia into attacking major population centres in Ukraine, which extended some support to the safe-haven gold.

As the markets assess the current geopolitical situation in Ukraine, the focus now shifts to the outcome of a two-day FOMC monetary policy meeting, scheduled to be announced on Wednesday. The highly-anticipated FOMC decision will play a key role in influencing the near-term USD price dynamics and provide a fresh directional impetus to gold prices. In the meantime, the broader market risk sentiment, along with the US bond yields and the USD price dynamics, would be looked upon for some trading opportunities around the XAU/USD.

Technical outlook

From a technical perspective, gold, so far, has shown some resilience below the 38.2% Fibonacci retracement level of the $1,780-$2,070 strong move up to the multi-year high. The next relevant support is pegged near the $1,945-$1,944 area and the 50% Fibo. level, around the $1,925 region. Some follow-through selling might shift the bias in favour of bearish traders and drag spot prices towards sub-$1,900 levels, or support marked by the 61.8% Fibo.

On the flip side, any meaningful recovery now seems to confront immediate resistance near the $1,986 area ahead of the key $2,000 psychological mark. The latter coincides with the 23.6% Fibo. level, which if cleared decisively should pave the way for the resumption of the recent strong bullish trajectory. Gold could then climb back towards the $2,050-$2,055 region and accelerate the momentum back towards the $2,070 zone, or the highest level since August 2020 touched last week.

Gold daily chart

Key levels to watch