• Gold gains some positive traction, snapping a two-day losing streak to a three-month low.
• Declining US bond yields cap the attempted USD recovery and lend support to the bullion.
• XAU/USD bulls seem cautious ahead of this week’s central bank events and the key US data.

Gold (XAU/USD) clings to modest intraday gains above the $4,000 psychological mark through the early European session, though the lack of follow-through buying warrants some caution before positioning for any meaningful recovery from a three-month low. Federal Reserve (Fed) officials recently signaled no urgency to raise interest rates immediately. Traders, however, still price in around an 80% chance that the US central bank will raise borrowing costs by the year-end. Moreover, geopolitical uncertainties underpin demand for the safe-haven US Dollar (USD), which, in turn, is seen as acting as a headwind for the precious metal.

S&P Global's flash US Manufacturing Purchasing Managers' Index (PMI) rose to 56 in October, hitting a 53-month high and beating estimates for a reading of 55.6. Meanwhile, the Services PMI matched forecasts and stood at 57.9, compared to 58.8 in September, while the Composite Output Index slipped to 57.6 from a five-year high of 58.4 in the previous month. Additional details revealed that the output price index moved up to 59.8, its highest reading since August 2022, suggesting that inflation could increase further and remain persistently high in the coming months. This comes on top of inflationary concerns stemming from elevated energy prices and underpins prospects for additional Fed tightening, keeping a lid on any meaningful upside for the non-yielding Gold. .

In fact, crude oil prices jumped to the highest level since September 16 amid supply concerns driven by attacks in Saudi Arabia and tensions involving Iran. In the latest developments, the Iran-backed Houthis in Yemen vowed on Sunday that they will keep attacking Saudi Arabia's King Khalid Airport in Riyadh. Moreover, the stalled US-Iran talks keep the geopolitical risk premium firmly in play and help limit deeper losses for the safe-haven Greenback, warranting some caution before placing aggressive bullish bets on gold. Traders might also opt to move to the sidelines ahead of this week's key central bank events and important US macro releases – the Advance Q3 GDP report and the Personal Consumption Expenditures (PCE) Price Index on Thursday.

The focus, however, will be on the outcome of the two-day FOMC policy meeting on Wednesday. In the absence of updated economic projections, traders will closely scrutinize the accompanying rate statement and Fed Chair Kevin Warsh's comments during the post-meeting press conference for more cues on the future policy path, which will influence the near-term USD price dynamics. Meanwhile, the Reserve Bank of New Zealand (RBNZ), the European Central Bank (ECB) and the Bank of Japan (BoJ) are also scheduled to announce their rate decisions this week. This might further infuse volatility around the Gold price. Nevertheless, the aforementioned fundamental backdrop warrants some caution before confirming that the XAU/USD pair has bottomed out.

XAU/USD 4-hour chart

Technical Analysis

The precious metal maintains a bearish near-term tone following last week's breakdown through a short-term trading range support near the $4,100 mark. Moreover, the recent repeated failures to conquer the 100-period Exponential Moving Average (EMA) validate the negative outlook, suggesting that the attempted recovery remains corrective within a broader downside bias.

Hence, any subsequent move up is more likely to be sold into and remain capped near the $4,100 support-turned-resistance. The next hurdle is clustered around the 100-period EMA at $4,135.95. The XAU/USD pair would need a sustained move above the said barrier for any shift to a more constructive outlook and additional gains toward reclaiming the $4,200 mark.

(The technical analysis of this story was written with the help of an AI tool. Know more.)

Central banks FAQs

Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.

A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.

A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.

Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.

Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.