Gold drifts lower on US-China trade optimism; Fed rate cut bets could limit losses

• Gold remains depressed as signs of easing US-China trade tensions dent safe-haven demand.

• Bets for more Fed rate cuts undermine the USD and could lend support to the precious metal.

• Traders also seem reluctant and opt to wait for the crucial two-day FOMC meeting this week.

Gold (XAU/USD) kicks off the new week on a weaker note, though it lacks strong follow-through selling and manages to hold above Friday's swing low through the Asian session. Signs of easing trade tensions between the US and China boosted investors' appetite for riskier assets. This is evident from the upbeat mood across the global equity markets and turns out to be a key factor undermining demand for the safe-haven precious metal. The downside, however, remains cushioned in the wake of dovish Federal Reserve (Fed) expectations and a modest US Dollar (USD) downtick.

Investors now seem to have fully priced in that the US central bank will lower borrowing costs two more times this year, and the bets were reaffirmed by softer consumer inflation figures released on Friday. This, in turn, keeps the USD depressed and should contribute to limiting deeper losses for the non-yielding Gold. Traders might also refrain from positioning for a firm near-term direction and opt to wait for the outcome of a two-day FOMC monetary policy meeting on Wednesday. The outlook will drive the USD in the near term and provide a meaningful impetus to the XAU/USD pair.

Daily Digest Market Movers: Gold bulls remain on the defensive amid receding safe-haven demand

Top Chinese and US economic officials on Sunday agreed on the framework of a potential trade deal that will be discussed when US President Donald Trump and Chinese President Xi Jinping meet later this week. US Treasury Secretary Scott Bessent said that discussions on the sidelines of the ASEAN Summit in Kuala Lumpur had eliminated the threat of 100% tariffs on Chinese imports starting November 1.

This helps soothe investor nerves and eases concerns about a further escalation of trade tensions between the world’s two largest economies. Moreover, the optimism sends stocks sharply higher at the start of a new week and exerts some downward pressure on the safe-haven Gold during the Asian session. However, bets for more interest rate cuts by the US Federal Reserve warrant some caution for bears.

The US Bureau of Labor Statistics reported on Friday that the headline Consumer Price Index rose by 0.3% in September, putting the annual inflation rate at 3%. Excluding food and energy, the gauge showed a 0.2% monthly gain and an annual rate stood at 3%. The reading fell short of consensus estimates and reaffirmed market bets that the US central bank will lower borrowing costs later this week.

Moreover, the CME Group's FedWatch Tool indicated that traders have nearly fully priced in another 25-basis-point Fed rate cut move in December. This, in turn, fails to assist the US Dollar to capitalize on Friday's goodish bounce from a one-week low. This, along with geopolitical risks stemming from the protracted Russia-Ukraine war, turns out to be a key factor acting as a tailwind for the non-yielding yellow metal.

Russia launched a drone attack on the Ukrainian capital, Kyiv, in the early hours of Sunday. Ukraine’s Air Force said that it downed four of nine missiles and 90 of 101 drones launched in the Russian attacks across the country. Furthermore, Russian President Vladimir Putin also announced a successful final test of a new nuclear-powered cruise missile. This could support the safe-haven commodity.

Traders might also opt to move to the sidelines ahead of this week's central bank event risks. Meanwhile, the focus will remain glued to the crucial FOMC policy decision on Wednesday, which will play a key role in influencing the near-term USD price dynamics and determining the next leg of a directional move for the XAU/USD pair.

Gold needs to find acceptance below $4,000 to back the case for a meaningful corrective decline

From a technical perspective, the commodity now seems to have found acceptance below the 23.6% Fibonacci retracement level of the July-October blowout rally. However, last week's bounce from the vicinity of the $4,000 psychological mark and mixed oscillators on the daily chart warrant caution for the XAU/USD bears. This, in turn, suggests that any subsequent slide below Friday's swing low, around the $4,044 area, might continue to attract some buyers near the said handle. This is followed by the 38.2% Fibo. retracement level, around the $3,948 region, which, if broken decisively, could drag the Gold price to sub-$3,900 levels. Some follow-through selling should pave the way for a fall towards the 50% retracement level, around the $3,810-$3,800 region, en route to the 50-day Simple Moving Average (SMA), currently pegged near the $3,775 area.

On the flip side, the Asian session high, around the $4,109-4,110 region, which coincides with the 23.6% Fibo. retracement level support break point might continue to act as an immediate hurdle. A sustained strength beyond could lift the Gold price to the $4,155-4,160 supply zone, which, if cleared, could trigger a short-covering rally. The XAU/USD pair might then accelerate the positive move towards reclaiming the $4,200 mark and climb further towards the next relevant hurdle near the $4,252-4,255 region.