Gold prices attracted some sellers and ended a two-day winning streak amid a bullish dollar scenario.
Expectations for less aggressive easing policies from the Federal Reserve supported U.S. bond yields and the dollar.
Geopolitical risks and bets on Federal Reserve rate cuts further limited the losses for gold/dollar.
Gold prices (XAU/USD) rose over 1% on Friday following the release of the U.S. Producer Price Index (PPI), closing near weekly highs. The index indicated a favorable inflation outlook and suggested that the Federal Reserve (Fed) would continue to cut rates. In addition, safe-haven demand generated by geopolitical tensions in the Middle East further benefited gold and propelled its rise.
That said, investors have now completely ruled out the possibility of the Fed making another ultra-large rate cut in November. This has kept U.S. Treasury yields high, with the dollar (USD) close to the highest levels reached last week since mid-August. Moreover, the optimism led by China's commitment to increase debt to revive the economy put some pressure on gold prices during Monday's Asian session.
Daily market movement: Gold prices are suppressed by a moderate strengthening of the dollar, with limited downside potential.
The U.S. Bureau of Labor Statistics reported that the overall Producer Price Index (PPI) for final demand in September rose by 1.8%, with the core index rising by 2.8% year-on-year.
The data was slightly above market expectations but indicated a slowdown in price increases, which should allow the Federal Reserve to continue cutting rates.
According to the FedWatch tool from the Chicago Mercantile Exchange, the market is currently pricing in a likelihood of over 90% for the Federal Reserve to lower borrowing costs by 25 basis points in November.However, due to the decreasing likelihood of a more aggressive easing policy by the Federal Reserve, the yield on the benchmark 10-year U.S. government bond has stabilized above the 4% threshold. In turn, this has helped the U.S. dollar to remain steadfast near two-month highs and become a key factor prompting new selling around gold prices on the first day of the new week.
Government data released over the weekend showed that China's overall Consumer Price Index for September was flat, with an annual rate of 0.4%, lower than market expectations. Coupled with the lack of numerical details on China's fiscal stimulus measures, as well as the escalation of geopolitical tensions in the Middle East, this should provide support for safe-haven precious metals.
The U.S. market was closed on Monday for Columbus Day, leaving XAU/USD at the mercy of dollar price dynamics and new geopolitical developments.
Technical Outlook: Gold prices set the stage for buying on dips, with $2,600 being crucial for bulls. Any subsequent decline may find some support near the $2,632-$2,630 area. Below this zone, gold prices could accelerate towards the $2,600 psychological level. A convincing break below the latter would be seen as a new trigger for bearish traders and pave the way for some significant declines. Then, gold/USD could fall to the next relevant support area near $2,560 and extend losses to the $2,535-$2,530 area, down to the psychological $2,500 level.
Meanwhile, the positive oscillators on the daily chart favor bullish traders. That said, it remains prudent to wait for some follow-through buying after the $2,660-$2,662 resistance level before preparing for further near-term appreciation. Subsequent gains could push gold prices higher towards the historical high, near the $2,685-$2,686 area touched in September. Following that is the $2,700 psychological level, and if decisively cleared, it would lay the foundation for the continuation of the established multi-month uptrend.