XAU/USD down but not out as Powell speech looms

• The price of gold maintains a correction near $2,650 on Monday morning despite more Chinese stimulus.
• The US dollar clings to recovery gains as the cooling period in US PCE supports bets for a big Fed rate cut in November.
• The price of gold is softening the extreme overbought conditions on the daily chart, favoring the buyers.

The price of gold maintained earlier corrective downside near $2,650 in Asian trade on Monday, shrugging off another upbeat market sentiment driven by Chinese stimulus. Traders are refraining from placing new directional bets on the price of gold ahead of US Federal Reserve (Fed) Jerome Powell’s speech later this month.

Gold price looks to Powell’s speech for fresh impetus

During his opening remarks last Thursday at the US Treasury Market Conference, Fed Chairman Powell did not talk about the outlook for economic and monetary policy. Traders are therefore eagerly awaiting Powell’s appearance for further clues about the size of a potential rate cut in November.

Markets are currently pricing in a 52% chance of a 50 basis point (bps) rate cut in November, CME Group’s FedWatch Tool shows, up slightly from the 50% chance seen a week ago . Friday’s core personal consumption expenditures (PCE) price index, the Fed’s preferred measure of inflation, did little to change market expectations for the Fed’s next rate cut.

The headline PCE price index rose 0.1% on the month, putting the annual inflation rate at 2.2%. The core PCE price index rose 2.7% year-on-year, as expected, while monthly core inflation edged down to 0.1%, from a previous reading of 0.2%. Core annual PCE edged closer to the central bank’s 2% target in August, exacerbating the pain in the US dollar (USD).

However, the gold price failed to take advantage of USD weakness and corrected from record highs of $2,686 hit last Thursday as investors took profits heading into the US Nonfarm Payrolls week. In addition, month-end and quarter-end flows came into play, weighing negatively on the gold price.

In trading so far this month, gold remains in the red despite renewed geopolitical escalation in the Middle East and further stimulus measures from China.

Over the weekend, Israel continued to strike Lebanon and claimed to have killed another senior Hezbollah figure following the killing of leader Hassan Nasrallah. Iran, which backs the powerful militant group, has vowed to retaliate, saying Nasrallah’s killing “will not go unanswered.”

Meanwhile, China announced more stimulus, with the nation’s central bank asking banks to cut mortgage rates on existing home loans by the end of October, likely by 50bps on average.

The latest stimulus-driven Chinese optimism was partly dented by China’s disappointing business PMI data for September. China’s official manufacturing PMI came in at 49.8, slightly better than the forecast of 49.5. However, the country’s Caixin Manufacturing PMI returned to contraction, reaching 49.3 in the same period from 50.4 in August.

Gold Price Technical Analysis: Daily Chart

The price of gold has eased out of extremely overbought territory, with the 14-day Relative Strength Index (RSI) set to enter bullish territory near 71.

If buyers return to bids, the previous high of $2,674 will be the initial content point, above which the record high of $2,686 will be tested.

A strong position above the all-time high is needed to take the $2,700 barrier, followed by rising trendline resistance at $2,710.

On the other hand, if the correction accelerates, the gold price will likely test the September 24 low of $2,623, below which the $2,600 threshold will come into play.

Further south, gold sellers could target the September 20 low of $2,585.