Gold prices have dropped over 4% after reaching record highs near $4,380. The decline is attributed to a stronger US Dollar and a more positive trade sentiment between the US and China, which reduces safe-haven demand.

Currently, Gold (XAU/USD) is trading around $4,135, having fallen almost 5% after briefly hitting $4,081 earlier. The technical setup indicates a potential double top pattern on the 4-hour chart, suggesting the possibility of a further weakening below $4,200.

Impact Of US China Trade Discussions

Improved risk appetite due to optimism about US-China trade discussions is affecting Gold. If the planned 100% tariffs on Chinese goods are avoided, it could further bolster risk assets and strengthen the US Dollar.

Although Gold has retreated, the broader outlook remains supported by expectations of a dovish shift in Federal Reserve policy. Lower interest rates benefit non-yielding assets like Gold, and ongoing geopolitical and economic uncertainties continue to attract safe haven flows.

President Trump expressed hope for a favourable trade deal with China at the APEC Summit, but warned of potential 155% tariffs if no deal is reached. The ongoing US government shutdown and strengthening US Dollar also influence market dynamics.

With gold pulling back sharply from its highs, we see a clear short-term bearish signal in the technical charts. The double top pattern around $4,380 suggests momentum has faded, making put options an attractive strategy to target a further decline. A break below the $4,200 neckline would confirm this view, opening the door to test support near $4,050 in the coming weeks.

Upcoming CPI Data And Market Outlook

We must pay close attention to this Friday’s delayed Consumer Price Index (CPI) data, as it will directly impact the Federal Reserve’s upcoming decision. Markets are pricing in a 98.9% probability of a rate cut this month, according to the CME FedWatch tool, a stance supported by recent inflation trends which have been moderating from the highs seen in previous years. Any deviation from this expectation in the CPI report will introduce significant market volatility for gold and the dollar.

This pullback, however, could be a strategic entry point for longer-term bullish positions, given the overwhelmingly dovish Fed expectations. We could consider buying call options with January 2026 expirations to position for a rebound after the expected rate cut is announced on October 30. This strategy allows us to capitalize on the fundamental support for gold while navigating the current bearish sentiment.

The strength in the US Dollar Index, now near 98.84, is a primary headwind for the precious metal. We remember the dollar’s powerful surge to over 114 back in late 2022, so while the current level is strong, it is not historically extreme. If the Fed’s policy decision weakens the dollar, gold will have a major catalyst for a sharp recovery.

Given the clashing signals between trade optimism and dovish monetary policy, we expect volatility to be high. The ongoing US government shutdown adds another layer of uncertainty that could flare up at any moment. A volatility-based strategy, such as a long straddle using options, could be prudent to profit from a large price swing in either direction as these events unfold.

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