Gold gains respite as oil retreats ahead of key US economic data

• Falling Oil prices following renewed US-Iran diplomatic efforts help Gold open the week higher.
• Gold's gains remain constrained by lingering inflation worries and expectations of a hawkish Fed.
• With the RSI nearing oversold territory, the technical picture for XAU/USD remains bearish.

Following a 6.87% decline in October and a fresh yearly low of $3,870 on Friday, Gold (XAU/USD) opens the week higher. Lower Oil prices, as the US and Iran pursue diplomatic efforts, are providing support for the precious metal. The recovery nevertheless remains tentative, with the fundamental backdrop still casting doubt on whether gains can be sustained.

On Monday, Iran’s Foreign Ministry spokesman Esmaeil Baghaei said, “Exchange of messages with the US continues,” adding that Deputy Foreign Minister Kazem Gharibabadi was in Doha to help advance the process. According to Iran, its proposal could allow the Strait of Hormuz to reopen within two days of an agreement, provided Washington lifts its naval blockade and satisfies Tehran’s demands. West Texas Intermediate (WTI) falls below $100 a barrel, a decline of around 3% on the day.

From its January all-time high near $5,600, Gold is now down around 30%. The metal has generally traded in the opposite direction to Oil since the US-Iran war started in late February. Higher energy costs pushed inflation up, prompting central banks, notably the Federal Reserve (Fed), to tighten monetary policy.

Although geopolitical uncertainty and inflation would normally support demand for Gold, expectations of higher interest rates are proving a greater drag on the non-yielding metal this time. Nor has Gold benefited from the AI-led sell-off in technology shares, even as it has weakened the US Dollar (USD) and lowered Treasury yields. Instead, traders have been selling the metal to meet margin calls and offset losses in other positions.

After earlier reaching a one-week low of 101.44, the US Dollar Index (DXY) stands at around 101.70, down 0.27% on the day. The index measures the Greenback against a basket of six major currencies. At the same time, the benchmark 10-year US Treasury yield remains close to a seven-week low, at around 4.91%. That is well below October’s 5.36% peak, the highest level since 2002.

US elections and economic releases come into focus

The US midterm elections on 3 November are the next focus, with the potential to move the US Dollar and, consequently, Gold. A full schedule of economic releases will also give traders further clues about the Fed’s interest rate trajectory. The ISM Manufacturing Purchasing Managers Index (PMI) is scheduled for Monday, with JOLTS Job Openings following on Tuesday. Wednesday brings ADP Employment Change and the ISM Services PMI, before the Nonfarm Payrolls (NFP) report on Friday.

After raising rates by 25 basis points (bps) in September, the Fed opted for patience in its inflation fight in October, voting 10-2 to hold interest rates at 3.75%-4.00%. According to CME FedWatch, market pricing implies a 72% probability of a rate increase in December.