Will Overbought Conditions Trigger a XAU/USD Correction?

• The price of gold is near record highs of $2,664 on Wednesday morning.
• US dollar eases wounds on Treasury yields, while China’s MLF tapering boosts sentiment.
• The gold price is entering extremely overbought conditions on the daily chart, risking a long-term correction.

The price of gold is consolidating near a record high of $2,664 on Wednesday morning, struggling for further growth amid a risk profile in the market and extremely overbought conditions on the daily chart.

Gold price extends winning streak, but for how long?

Risk sentiment gets a fresh boost in Asian trade on Wednesday after the People’s Bank of China (PBOC) cut its medium-term lending rate (MLF) from 2.30% to 2.0% on Thursday in a bid to strengthen the declining economy. The MLF rate cut is one such measure among a number of other stimulus efforts undertaken by China of late.

The gold price seems to lack bullish conviction at the moment as stimulus optimism from China weighs on the traditional safe haven while raising hopes of a potential increase in Chinese demand as the dragon nation is the largest consumer of gold in the world.

However, gold prices are supported by rising global equities and rising expectations that the US Federal Reserve (Fed) will opt for a 50 basis point (bps) interest rate cut in November, which continues to undercut the dollar American (USD) and US. Treasury bond yields.

On Tuesday, the USD was thrown all over the place along with US Treasury bond yields due to risk flows driven by China’s stimulus and weak data on consumer confidence from the US Conference Board (CB) and regional activity. The weak data fueled another huge cut in Fed interest rates at the next meeting.

The CB consumer confidence index fell to 98.7 this month from an upwardly revised 105.6 in August, posting the biggest drop since August 2021. Meanwhile, the Richmond Fed fell to a low of 52 months of -21 from a previous low of -19 in August and a prior low of -17 in July.

Markets are currently pricing in about a 60 percent chance of such a move, CME Group’s Fed WatchTool shows. For the Fed’s next two meetings, futures imply cuts of more than 80 bps. In addition, the US dollar also bore the brunt of the sell-off in US Treasury yields across the curve, triggered by a strong auction of two-year US Treasuries.

Looking ahead, there are no top US economic data in the registry. However, Fed policymakers’ speeches and risk trends will continue to play a critical role in gold price action. In addition, gold traders could also resort to repositioning ahead of plenty of Fedspeak ahead on Thursday, including key opening remarks from Fed Chairman Jerome Powell at the US Treasury Market Conference in New York.

Gold Price Technical Analysis: Daily Chart

As seen on the daily chart, overbought conditions, as represented by the 14-day Relative Strength Index (RSI), which is falling below the 80 level, suggest that a correction may be underway.

If buyers flex their muscles, acceptance above the $2,670 round level is essential to unleash further upside towards the $2,700 barrier.

On the other hand, any correction in the gold price will likely test the previous day’s low of $2,623, below which the $2,600 threshold will come into play.

Further south, gold sellers could target the September 20 low of $2,585.