The XAU/USD pair halted its decline at the 1253 support level after five consecutive days of losses. The pair turned north after Fitch Ratings announced that it put the world’s largest economy on watch for a possible credit downgrade. The rating agency said “Although Fitch continues to believe that the debt ceiling will be raised soon, the political brinkmanship and reduced financing flexibility could increase the risk of a U.S. default” in a statement yesterday.
Although concerns over a devastating default triggered some profit taking, optimism for progress was boosted after Senate Majority Leader Harry Reid and Minority Leader Mitch McConnell said they are trying to reach a deal before the U.S. Treasury exhausts its borrowing authority on Thursday. I assume an agreement will be reached eventually but the time is ticking. Since gold investors remain focused on the U.S. budget battle, it wouldn't be surprising to see some retracement as the fear factor comes back into the market.
From a technical perspective, yesterday's hammer like candle indicates that lower prices are rejected by traders but of course further confirmation is required to say that the trend is about to reverse. Today the key levels to watch will be the 1291 and 1260 levels. If the bulls manage to hold prices above the 1275 level, it is technically possible see a short-term bounce targeting the 1302 resistance level where the Ichimoku clouds (4-hour time frame) and a descending trend line intersect.
Breaking above this resistance could extend this move towards 1326 (Fibonacci 23.6 based on the bearish run from 1795.75 to 1180.21). However, if the bears regain their strength and drag prices below the 1260 support level, it is likely that we will revisit 1253. Below that, there is little to slow down the bears' progression until 1245.