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Summary: Gold bulls struggled to capitalize on Friday's modest rally from the $1970 area and continue to come under selling pressure in the new week. Nevertheless, with the consolidation of support at the lower end of the range-bound channel, bulls may be interested in pushing prices back above the key psychological level of $2,000.

Fundamentals

The prospect of further Fed tightening helped the U.S. dollar to attract some buying on Monday, which in turn was seen as a key factor dragging gold prices lower for a second day in a row. Indeed, the market now seems convinced that the Fed will continue to raise interest rates to curb inflation and has fully digested the possibility of a 25 basis-point hike at the next FOMC policy meeting. On top of that, the federal funds rate suggests that another rate hike in June is unlikely.

Hawkish remarks from several Fed officials in recent weeks and positive U.S. macro data due to be released have boosted these bets, indicating that the U.S. economy remains resilient.

On Friday, the S&P Global PMI data showed that overall business activity in the U.S. private sector expanded at a faster pace in April. Service sector activity grew for the third consecutive month at the fastest pace in a year, while U.S. manufacturing entered the expansionary territory for the first time since October 2022.

Nonetheless, the tone around weaker U.S. Treasury yields is discouraging USD bulls from making aggressive bullish bets and providing support for gold prices. In addition, a fresh fall in equities further limits the downside for gold prices. Meanwhile, the prospect of further Fed tightening has heightened concerns about economic headwinds from rising borrowing costs, which in turn has dampened investors' appetite for riskier assets and boosted demand for traditional safe-haven assets such as gold.

Despite the fact that gold prices fell below $2,000 before last weekend, hitting some recent bullish sentiment, very few institutions or investors expect significant selling pressure for gold in the short term, given the high degree of uncertainty in financial markets. Buying on dips will remain the mainstream in the near term.

According to a survey conducted by precious metals website Kitco, out of 23 Wall Street analysts surveyed, six expect gold prices to rise this week, eight are bearish, and nine expect consolidation.

Of the 618 general investors surveyed, 329 (53%) expect gold prices to move higher on the week, 166 (27%) expect them to move lower, and 123 (20%) are neutral.

We  hold a neutral outlook for gold's performance in May. Technically, it is now limited by the $2,057 level and overbought conditions on a monthly basis. While we do not expect a sharp reversal so far, gold is expected to remain below the same trading range of $2,030 in April. To break it, gold needs strong drivers such as a new inflationary spiral, strong signs of a U.S. recession or apparent liquidity problems at the Fed, debt ceiling issues, and so on.

Technical Analysis

Gold has been underperforming over the past few days and is still under pressure from its 5-week SMA after breaking below the 20-day SMA. Nevertheless, prices remain bullish in the long-term time frame, which could continue to drive range trading with the consolidation of support levels.

Indicators confirm our expectations, with momentum tilted to the downside as the RSI approaches the 50-neutral range. However, the MACD is below the 0-axis and in positive consolidation territory.

If the bulls continue to stay above the upper channel and the 50-day SMA, there is a chance that prices will again push back to the psychological mark of $2,000. More follow-through buying could push the price to test the $2030 range.

If the upper channel or the previous low of $1,970 is broken again, the focus will shift to the downside to the $1,923 range. A break below this level would add downside pressure and bring about a trend reversal. From here, gold would return to its 200-day SMA of around $1,805.

Overall, gold prices have defended their upward momentum since the sharp pullback from $2,047, albeit with continued weakness. As long as bulls continue to hold the key level of $1,970, gold remains on an upward trajectory. From a trading perspective, buying on dips should be the primary strategy.

Trading Recommendations

Trading Direction: Long

Entry Price: 1983

Target Price: 2030

Stop Loss: 1950

Valid Until: 2022-05-08 23:55:00

Support: 1973, 1970, 1960

Resistance: 1988, 1994, 2000