Gold (XAU/USD) has bounced back after the latest US Consumer Price Index (CPI) data came in below expectations. This suggests a greater chance of the Federal Reserve cutting rates by 25 basis points in their upcoming October meeting. Gold is currently priced at about $4,130, recovering from lows of around $4,044 during earlier trading sessions but is on track to break a nine-week winning streak. Lower borrowing costs make gold more appealing as they lessen the opportunity cost of holding non-yielding assets. There is growing optimism in the market over a potential easing of tensions in the US-China trade situation. US President Trump is scheduled to meet with Chinese President Xi Jinping on October 30 at the APEC Summit. Despite ongoing market fluctuations, gold demand stays strong due to US government shutdowns and persistent geopolitical issues.

CPI Data Impact

The US CPI data showed a 0.3% increase in September, which is below the 0.4% forecast. Core CPI also rose by 0.2%, missing expectations. Meanwhile, the S&P Global Flash Composite PMI for October rose to 54.8, with the Services PMI at 55.2 and Manufacturing PMI at 52.2. Consumer sentiment is declining, although inflation expectations are mixed. The forex heatmap indicates how the US dollar is performing against other major currencies. The dollar was particularly strong against the Canadian dollar, while its performance varied slightly against the euro, yen, and pound. With the Federal Reserve meeting approaching, the weaker inflation data makes a rate cut almost certain. This marks a significant shift in policy, especially after the aggressive rate hikes of 2022 and 2023. In derivative markets, this implies a shift towards a weaker US dollar and ongoing strength in gold. Traders might consider bull call spreads on gold futures as a way to manage risk.

Strategizing Market Volatility

The US-China meeting on October 30 could lead to significant market volatility, resulting in a binary outcome. We recall how the CBOE Volatility Index (VIX) surged from around 13 to over 20 during past trade tensions in 2019, benefiting those who were positioned for volatility. One way to profit from potential price swings following the discussions is by buying straddles or strangles on major equity index futures. Currently, gold is trading in a narrow range, facing resistance near $4,150 while finding support around $4,000. This setup is well-suited for income-generating strategies, like selling out-of-the-money put options below the $3,900 support level. This strategy allows us to earn premium while betting that increased safe-haven demand will prevent a sharp price drop leading up to key events next week. Rising trade tensions with Canada have caused the US Dollar to gain strength against the Canadian Dollar. This specific geopolitical risk can be isolated and traded effectively. We might look into purchasing call options on the USD/CAD currency pair to take advantage of any further decline in relations between the two countries. Create your live VT Markets account and start trading now.

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