Overbought conditions could trigger a correction

• Gold posted a third straight week of gains, hitting a new all-time high on Thursday.
• If the bullish momentum persists, the $2,700 level emerges immediately above.
• Fed rate cut bets, geopolitical tensions continue to support the yellow metal.

Gold (XAU/USD) extended its positive performance this week, hitting all-time highs at levels just below $2,700 per troy ounce on Thursday.

The rise in the precious metal remained supported, firstly, by continued expectations of further interest rate cuts by the Federal Reserve (Fed) in the coming meetings and until 2025 and, secondly, by unrestrained geopolitical concerns stemming mainly from Middle east. , while the Russia-Ukraine conflict adds to this problem.

Last but not least, contributing to bullion’s bullion trend was the equally tenacious position offered by the US dollar (USD).

Next on tap… $3,000?

As the US dollar approaches its third straight week of losses, gold prices will mark their third straight week of gains.

Since late June, traders have continued to target the non-yielding metal rising pari passu expectations of a Fed rate cut, culminating in a significant 50 basis point (bps) cut at the September 18 Fed meeting .

However, market participants didn’t seem quite happy with the Fed’s huge move. That said, investors still expect about 75 bps of easing by the central bank for the rest of the year, according to the CME FedWatch tool.

Looking longer term, investors expect interest rate cuts between 100 and 125 bps by the end of 2025.

Against this backdrop, it is not surprising that the yellow metal may have already embarked on a likely visit to the key $3,000 level, which it looks set to touch sooner rather than later. However, the current overbought market conditions may require some sense, allowing for a near-term corrective pullback.

At this point, and given the strong rally seen in gold prices, a “purge” would be more than welcome by those who are afraid to enter the market at current levels, while giving a new chance to those who fear missing out space (FOMO).

Geopolitical effervescence continues to support the uptrend

Another factor behind the precious metal’s significant upward movement is the unrelenting geopolitical turmoil surrounding the Israel-Hamas crisis, as well as the Russia-Ukraine conflict, which is likely to enter its third year in February.

The addition of flight to safety comes to the fore every time news breaks about the deterioration of any of these scenarios, which unfortunately don’t seem to be ending anytime soon.

And the US dollar?

The greenback has been on a steady decline since July, accompanied by growing speculation of an easing of extra-monetary policy by the Fed. Now that the central bank has begun its rate-cutting cycle and with inflation sailing firmly towards the 2% target, hopes for a sustained recovery in the US dollar appear to be diminishing daily, at least for the foreseeable future.

Gold technical outlook

As mentioned above, gold’s current overbought conditions, according to the daily RSI around 75, leave the door open for a near-term correction.

However, the constructive outlook appears to be anything but subdued. That said, there is an immediate upside barrier at the $2,685 record high (Thursday’s high) and the round $2,700 level. Once this level is broken, Fibonacci extensions of the 2024 uptrend appear at $2,876, followed by $2,975 and then $3,119.

Assume that the sellers regain the initiative. In this scenario, there is an initial dispute at the weekly low of $2,546 (September 18), which comes ahead of the September low of $2,471 (September 4) and precedes the transitory 100-day SMA at $2,428.

Technically, the positive outlook for the metal should remain unchanged as long as it trades above the key 200-day SMA at $2,288.