The gold price has been relatively inactive compared to other markets this week, with the US Dollar and Treasury yields gaining momentum amidst risk aversion in the financial markets.
Volatility has increased slightly, leading to speculation about potential movements in the XAU/USD (Gold vs. US Dollar) pair.
The upcoming release of non-farm payrolls data is anticipated to have an impact on market developments.
Earlier in the week, Fitch’s downgrade of US sovereign debt credit rating to AA+ from AAA triggered a risk-off sentiment that affected various asset classes.
Despite Treasury Secretary Janet Yellen’s criticism of the downgrade, concerns about US debt remain elevated. The US Department of Treasury announced plans to issue US$ 103 billion in the coming week, reflecting a higher borrowing cost.
Investors have been demanding higher rewards for term risk, particularly in the back end of the yield curve, as the US government balance sheet deteriorates over time.
The benchmark 10-year Treasury note is approaching 4.20%, its highest level since November of the previous year.
In contrast, the short end of the Treasury curve appears more stable, with the market perceiving the Federal Reserve to be nearing the end of its tightening cycle. The 2-year bond has been trading within a range of 4.85% to 4.95% for two weeks.
Amidst the risk-off sentiment, the US Dollar has benefited, and the DXY (USD) index has been climbing after hitting a low in the middle of July.
The GVZ index, which measures implied volatility for gold similar to the VIX index for the S&P 500, has seen a slight uptick in the past few trading sessions. This may suggest market uncertainty and the possibility of a significant price movement in gold.
Despite these challenges, the gold market has held up reasonably well. However, if the current headwinds persist, the precious metal could face potential downside risks.
Technical analysis indicates that the gold price is currently testing trend line support. A break lower could lead to support around the 1885 – 1895 area, where prior lows, a breakpoint, the 200-day simple moving average (SMA), and the 38.2% Fibonacci Retracement level converge. Further down, the 50% Fibonacci Retracement level at 1838 may provide additional support.
On the upside, resistance levels could be observed around the recent peak of 1897 or the breakpoint near 2000.
In conclusion, the gold market appears to be at a critical juncture, influenced by the movements in the US Dollar and Treasury yields, along with overall market volatility. Traders are closely watching these factors to determine the next direction for XAU/USD
