As gold prices finish a dismal second quarter before the long weekend, where to for XAU/USD?

Gold prices weakened over the past 24 hours, sinking almost 0.6%. It was a soft ending for the second quarter, with the yellow metal weakening 6.66% over the past 3 months. That was the worst performance since the first quarter of 2021. Moreover, XAU/USD remains unchanged from levels achieved in the summer of 2020.

Interestingly, the anti-fiat yellow metal weakened despite a combination of favorable factors. Namely, both the US dollar and Treasury yields weakened on Thursday. This was in response to softer-than-expected PCE core data. The latter is the Federal Reserve’s preferred inflation gauge, and it showed a sign of cooling underlying price pressures.

That said, sentiment was unable to capitalize on the potential of a less hawkish Fed, perhaps due to rising concerns about a US recession. The Fed is in a tough spot. Due to its inaction on rising inflation from last year, the central bank must pivot more aggressively to compensate for its lack of activity. Moreover, monetary tightening across the globe is not a fundamentally friendly environment for precious metals.

The US Independence Day holiday on Monday is making for a long weekend. Gold volatility could remain subdued before markets close this week. US ISM manufacturing PMI data is due over the remaining 24 hours. A 54.5 outcome is seen for June, down from 56.1 prior. Outside of a material surprise in either direction, XAU/USD may remain glued to prevailing market sentiment

Gold technical analysis

The decline in gold as of late has brought XAU/USD deeper into the 1787 – 1810 support zone. Clearing this range could be a sign of further pain to come for the yellow metal. Guiding the pair lower has been a falling trendline from March. In the event of a turn higher, this line could reinstate the dominant downside focus. Extending losses would place the focus on the early 2022 low at 1778 before the December low at 1753 comes into play.

XAU/USD daily chart

Gold sentiment outlook - bearish

The IGCS gauge shows that about 86% of retail traders are net-long gold. Since IGCS tends to function as a contrarian indicator, this is a sign that prices may continue falling. Downside exposure has declined by 5.67% and 16.91% compared to yesterday and last week respectively. With that in mind, the combination of current sentiment and recent shifts in positioning are offering a stronger bearish contrarian trading bias.

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