Is this the moment of reckoning for gold?

The apparent progress in US debt ceiling talks and hawkish US Federal Reserve commentary has taken off some of the heat off gold’s rally. The focus now shifts to key support levels – a break below which would solidify the chances that gold’s rally had peaked for now.

XAU/USD has been lofty in recent weeks amid fears of a potential US debt default and hopes of an end of the Fed hiking cycle. But those drivers appear to be changing.

“I’m confident that we’re going to continue to make progress toward avoiding default and fulfilling America’s responsibility as a leader on the world stage”, US President Joe Biden said after a meeting with top Republican lawmakers met at the White House on Tuesday.

XAU/USD daily chart

US Treasury yields have risen in recent days following hawkish comments from Fed officials – Richmond Fed President Thomas Barkin said he was “comfortable” with raising rates further if needed to lower inflation.

Cleveland Fed chief Loretta Mester said the US central bank was not at a point yet where it can hold rates steady. This follows remarks from New York Federal Reserve President John Williams last week that the Fed may not be done raising rates.

XAU/USD monthly chart

The Fed earlier this month raised interest rates by 25 bps as expected, but indicated a pause in the hiking cycle. Markets are currently pricing in an 18% chance of another 25 basis points of a rate hike at the June meeting.

The odds of 75 basis points rate cuts by the year-end have scaled back to 35% from 42% a week ago, according to CME’s FedWatch tool.

XAU/USD weekly chart

On technical charts, the momentum on higher timeframe charts has been a concern in recent months.

However, a price confirmation has been lacking, that is, gold hasn’t broken any key support even on intraday charts. For instance, XAU/USD is holding above crucial support at the mid-April low of 1970 and the 200-period moving average on the 240-minute charts.

XAU/USD 240-minutes chart

However, Tuesday’s drop below the moving average is a sign that cracks are beginning to appear.

This is confirmed by the 240-minute colour-coded candlestick chart (based on trending/momentum indicators) – for the first time since March, red candles have started to appear, that is, a bearish phase could be setting in.

Moreover, on the daily charts, XAU/USD has entered a consolidation phase – note the early-May high of 2072 was part of the consolidation and not the start of a new leg higher (which the subsequent price action has confirmed).

To be fair, unless 1970 support gives way, the path of least resistance could be sideways at best. However, any break below 1970 could expose downside risks toward 1925.

XAU/USD daily chart

^{*Note: In the above colour-coded chart, blue candles represent a Bullish phase. Red candles represent a Bearish phase. Grey candles serve as Consolidation phases (within a Bullish or a Bearish phase), but sometimes they tend to form at the end of a trend. Note: Candle colors are not predictive – they merely state what the current trend is. Indeed, the candle color can change in the next bar. False patterns can occur around the 200-period moving average, or around a support/resistance and/or in sideways/choppy market. The author does not guarantee the accuracy of the information. Past performance is not indicative of future performance. Users of the information do so at their own risk.}