Gold prices may find temporary relief as the US Dollar and Treasury yields retreat, but the next three trading days could prove decisive for the precious metal. Investors are weighing shifting US-Iran tensions, Israel's political outlook, and the Federal Reserve's upcoming policy decision, all of which could determine the next major move in XAU/USD.
The US 10-year Treasury yield rebounded on Friday, as expected, helping the US Dollar strengthen into the close. However, both opened lower on Monday after President Donald Trump said there would be no attack on Iran that day, offering some relief to markets at the start of the week.
Meanwhile, October US economic activity data presented a mixed picture. The S&P Global Services PMI came in at 57.9, slightly below expectations of 58.0 and down from the previous reading of 59.8. The Manufacturing PMI stood at 56.0, exceeding expectations of 55.5 but falling from 57.0 in the previous month.
New orders reached their highest level in more than four and a half years, while business output expectations for the next 12 months slowed from September but remained the second-highest reading of the year. Resilient manufacturing activity and persistent inflation concerns helped limit gold's gains on Friday.
## Small-Scale “Epic Fury” Operation Under Consideration
During his midterm election campaign, Trump suggested that the US could launch another operation against Iran, describing a potential action as a smaller-scale version of “Epic Fury.” He also indicated that Cuba could become a subsequent focus after Iran.
Markets interpreted these remarks as a warning that military action could take place in the near future, triggering a sharp rally in oil prices over the final two trading days of last week. Brent crude briefly climbed above $116 per barrel, while West Texas Intermediate (WTI) reached $103 per barrel.
However, Trump's latest remarks that no attack would take place before the US midterm elections offered temporary relief to markets that had been gripped by uncertainty over the weekend.
Nevertheless, geopolitical risks remain elevated. The New York Times previously reported that the US and Israel had developed specific plans for another potential attack on Iran following the US midterm elections. Potential targets could include Iranian nuclear facilities, missile and drone storage sites, and energy infrastructure.
This uncertainty means markets may remain on edge until the midterm elections scheduled for November 3.
There are also concerns that Trump could delay military action until the outcome of Israel's political developments becomes clearer. With Israel's election scheduled for October 27, investors are watching whether Benjamin Netanyahu remains in power and whether Washington and Jerusalem continue coordinating their approach toward Iran.
If Netanyahu retains his position, markets may become increasingly concerned about renewed joint military action against Iran. One risk scenario is that an attack could occur as early as the coming weekend, after the FOMC meeting but before the US midterm elections. However, a post-election escalation remains a major geopolitical risk for the following week.
At the same time, rising oil prices are reinforcing inflation concerns and increasing the likelihood that the Federal Reserve will maintain restrictive monetary policy for longer. Higher interest rates increase the opportunity cost of holding non-yielding gold, potentially limiting its upside.
## US Economic Data and the FOMC Meeting Take Center Stage
The economic calendar is expected to play a crucial role in determining gold's short-term direction.
Tuesday's releases include US durable goods orders, the Conference Board Consumer Confidence Index, and new home sales. Durable goods orders and consumer confidence will be particularly important in assessing the strength of economic activity and household sentiment.
Attention will then turn to the Federal Reserve's two-day FOMC meeting on October 27–28. Markets broadly expect the Fed to keep its benchmark interest rate unchanged at 4.00%, making the accompanying policy statement and comments from Fed Chair Kevin Warsh particularly important.
Later in the week, the US Personal Consumption Expenditures (PCE) Price Index and third-quarter Gross Domestic Product (GDP) figures, scheduled for Thursday, will provide further insight into inflation and economic growth. Friday's focus will shift to the Bank of Japan's policy announcement and the Chicago PMI.
The Fed faces a difficult balancing act. Policymakers need to assess whether persistent inflation is becoming embedded in the economy while also considering the risk that prolonged monetary tightening could slow economic activity.
If inflation remains elevated but economic growth begins to weaken, the probability of additional rate hikes could decline. Conversely, if economic indicators remain strong and price pressures persist, the Fed may maintain a more hawkish stance.
For gold, the combination of inflation data, economic growth, and the Fed's policy guidance could determine whether the recent decline extends or gives way to a stronger recovery.
## Treasury Yields Remain a Key Driver for Gold
Despite the dominant geopolitical headlines, US Treasury yields remain one of the most important indicators for the direction of gold prices, particularly as markets approach the Federal Reserve's policy announcement.
If Treasury yields continue moving lower, gold could avoid a deeper decline and potentially regain upward momentum. Lower yields generally reduce the opportunity cost of holding non-interest-bearing assets and can weaken support for the US Dollar.
Conversely, a renewed rise in Treasury yields could place additional pressure on gold and force traders to reconsider bullish positions in favor of selling strategies.
The next one to three trading days are therefore particularly important as investors assess the interaction between geopolitical developments, inflation expectations, and the Fed's policy outlook.
## Three Key Scenarios for Gold in the Coming Days
### 1. Netanyahu Remains Prime Minister of Israel
If Netanyahu retains power, concerns could intensify that the US and Israel will resume coordinated military action against Iran in the near future. Such a development could trigger another escalation in gepolitical tensions.
Potential market implications include:
- **Oil prices:** Crude oil could extend its rally, with WTI potentially testing $110 per barrel or higher, intensifying inflation concerns.
- **Federal Reserve policy:** Persistent energy-driven inflation could strengthen expectations of tighter monetary policy. Traders should watch for potentially more hawkish comments from Kevin Warsh following the FOMC meeting on Wednesday, October 28, US time.
- **Gold price:** Gold could face renewed selling pressure, with a potential break below $3,886 opening the way toward support near $3,719 and, in a deeper decline, $3,550.
These levels represent potential downside scenarios rather than confirmed price targets. Actual market reactions will depend on the scale of any escalation and the accompanying movement in Treasury yields and the US Dollar.