Gold prices fell for the second day in a row after briefly rising above $4,100. This drop is due to a mixed economic backdrop, with positive updates on US-China trade prompting investors to seek riskier assets. Lower demand for gold, known as a safe haven during uncertainty, follows easing trade tensions between these two economies.

Federal Reserve’s Stance Supports Gold

At the same time, the Federal Reserve’s cautious approach is helping gold prices, as recent US consumer inflation data shows signs of weakness. Many expect the Fed to cut borrowing costs two more times by the end of the year. This has put pressure on the US Dollar, creating a more favorable environment for gold. On the geopolitical side, gold remains supported by ongoing conflicts, such as the Russia-Ukraine war. Ukraine’s Air Force recently responded to a Russian drone strike, while concerns are rising over Russia’s new missile test. The upcoming Federal Reserve meeting will be a crucial event that could impact both the US Dollar and gold prices. Technically, gold is struggling to maintain its support level, having dipped below the 23.6% Fibonacci retracement. However, holding around $4,000 indicates caution for those betting against gold. Important price points to watch include falling below $3,044, which could signal buying opportunities, while breaking above $4,110 might lead to upward momentum. Currently, the gold market is in a tug-of-war, with prices around $4,100 per ounce. Optimism about US-China trade talks clashes with expectations of a dovish Federal Reserve. This uncertainty keeps the VIX, a measure of stock market volatility, around 19, but it could change quickly. For traders using derivatives, this environment suggests preparing for a breakout rather than following a clear trend in the coming weeks.

Upcoming FOMC Meeting

The forthcoming FOMC meeting is the top event to watch. A 25-basis-point rate cut is nearly certain, with a 98% chance, according to the CME FedWatch tool. What really matters will be the Fed’s future guidance, especially with inflation still at 3%, which is above the Fed’s target and reminiscent of tough inflation seen in 2023. Any suggestion that the Fed might pause rate cuts after this meeting could significantly affect interest rate futures and the value of the Dollar. Positive news from US-China trade talks is boosting investor risk appetite. However, we have seen this pattern in past trade wars (2018-2020), where sentiment could shift dramatically based on a single news headline. November soybean futures recently surged over 8% based on hopes for a deal at the upcoming ASEAN summit. Derivative traders should remain cautious about this optimism and think about hedging long equity positions due to the high potential for disappointment, especially following earlier aggressive tariffs. For gold options, the focus around the $4,100 level is causing a rise in open interest for November and December at the $4,000 puts and $4,200 calls. This suggests the market is preparing for a significant move following the FOMC announcement. A strategy such as a long strangle, buying both an out-of-the-money call and put, could be effective for traders anticipating increased volatility but uncertain about the direction. Create your live VT Markets account and start trading now.

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