Gold starts retracing daily rally on improving sentiment, trades above $1,600

• PBoC says impact of coronavirus on economy will be limited.
• 10-year US Treasury bond yield erases early gains.
• US Dollar Index stays near 99.50 ahead of FOMC minutes.

The XAU/USD pair rose to its highest level since January 8th at $1,611.07 and came with a touching distance of a new seven-year high. However, with the market sentiment improving ahead of the American session, the pair erased a portion of its earlier gains and was last seen trading at $1,606.90, still adding 0.33% on the day.

PBoC downplays coronavirus' impact

In in its monetary policy implementation report for the fourth quarter, the People's Bank of China (PBoC) said that the size and the duration of the coronavirus outbreak's impact on the economy were expected to be limited. "The fundamentals of China's economy have not changed," the PBoC added to boost the market mood.

Reflecting the positive shift in the risk perception, the 10-year US Treasury bond yield erased its early losses to turn flat on the day and major European equity indexes edged higher.

On the other hand, the broad USD strength also seems to be making it difficult for the pair to stretch higher. The US Dollar Index, which tracks the USD's performance against a basket of six major currencies, is staying at fresh multi-month highs near 99.50 before the FOMC publishes the minutes of its January monetary policy meeting later in the day.

In the meantime, markets will be paying close attention to Wall Street's performance to see if the risk flows start to dominate the markets in the second half of the day.

Technical levels to watch for