Gold’s rally fades on failure to sustain key technical resistance

Improved market sentiment on Monday reduces demand for the safe-haven assets, including gold. This is preventing the Gold Index (XAU/USD) from powering higher. However, market’s overall confusion could soon resurface if the Fed fails to convince investors this week that the worst is over in terms of financial instability.

Gold price rallied in overnight trading, briefly hitting ~$2015, its highest mark in over a year, but gains fizzled out during the New York session, with the precious metal flatlining around the $1,975 level despite broad-based U.S. dollar weakness in the forex space. At the time of writing, gold is trading around $ 1977 per ounce, namely retreating from the trading day’s $2009.75 high.

In recent days, gold has been partly boosted by risk-off mood triggered by fears that the turmoil in the U.S. and European banking sector could lead to financial Armageddon, but those concerns appear to be abating on Monday.

It is too early to say that the crisis of confidence has been resolved, but recent measures taken by various central banks and other government authorities around the world have helped to reduce runaway panic, curbing the risks of contagion for now.

In the US, the Fed has adopted emergency actions to shore up troubled banks in need of liquidity following the collapse of SVB and SBNY. In Europe, Swiss regulators at the eleventh hour this weekend brokered a deal for UBS to acquire its beleaguered and long-time rival Credit Suisse, a move that was applauded by global investors.

With sentiment on the mend, defensive assets could lose some of their appeal, preventing gold prices from extending their recent advance. However, if the banking system upheaval were to increase again, XAU/USD could pick up strong bullish momentum in the blink of an eye to power higher and challenge its 2022 highs just a touch below $2,080.

Markets will have more clues about the near-term outlook on Wednesday when the Fed announces its March monetary policy decision. There are many doubts among retail traders, but one thing is clear: if policymakers fail to convince markets the worst is over in terms of financial instability, gold prices’ next leg higher could be just around the corner.