Gold Price Prediction: XAU/USD recovers to $1,700; negative potential intact

Gold extends Tuesday's retreat from a weekly high and continues to lose ground through the first half of Wednesday's trading session. The XAU/USD falls further below $1,700 for the third consecutive trading day, but stops just above the monthly low reached last Thursday.

The persistent purchasing of U.S. dollars remains ongoing and is a crucial element imposing downward pressure on dollar-denominated gold. In fact, the USD Index, which measures the performance of the greenback against a basket of currencies, reaches a new 20-year high in anticipation of a more aggressive Fed policy tightening.

In fact, current market pricing shows a probability of greater than 70% that the Fed will increase interest rates by 75 basis points at its upcoming meeting on September 20-21. The bets were confirmed by Tuesday's positive US ISM Services PMI, which caused a sell-off in the US government debt market and pushed the 30-year bond yield to its highest level since 2014.

In addition, the yield on the benchmark 10-year US Treasury note rose to levels not observed since June 16. This, in turn, provides extra support for the greenback and also contributes to a shift away from non-yielding gold. However, the existing risk-averse sentiment helps prevent deeper losses for the safe-haven precious metal for the time being.

Fears of a recession have been fueled by the likelihood of rapid interest rate increases, as well as the economic headwinds resulting from new COVID-19 restrictions in China and the ongoing conflict in Ukraine. This continues to weigh on investor sentiment, as evidenced by the generally gloomier tone on equities markets, and supports conventional safe-haven investments.

The flight to safety aids gold's comeback to the $1,700 round-number mark, but further recovery remains elusive. In the absence of market-moving economic releases from the United States, Fed officials' remarks will play a significant role in determining the USD's price dynamics. This could create chances for short-term trading in the commodity.