XAU/USD rose around 0.50% on Monday as talks between the United States (US) and Iran began on a positive note. At the same time, falling oil prices helped ease inflation concerns and supported the precious metal's rise.
At 9.10 am, gold was trading at $4,185, down 0.15% since it opened early Tuesday in Asian trading.
Market sentiment improved slightly despite continued volatility in US stocks. US Vice President JD Vance said talks between Washington and Tehran had laid a good foundation for reaching a deal, despite tensions in the Middle East remaining high.
Over the weekend, Iran reportedly threatened to close the Strait of Hormuz. However, the threat was dropped after US President Donald Trump warned that military action would be resumed if Tehran took such a step.
Oil prices continued to fall as West Texas Intermediate (WTI) crude oil fell 2.40% to US$73.67 per barrel.
The fall in oil prices is seen as easing inflationary pressures and increasing the appeal of gold, which typically benefits in a lower interest rate environment.
The absence of major economic data from the US has kept investors' attention focused on the Federal Reserve's (Fed) hawkish stance.
The market is now pricing in a near 90% probability that the Fed will raise interest rates in December after nearly half of the Federal Open Market Committee (FOMC) members supported a rate hike in 2026.
Several major financial institutions are also expecting interest rate hikes in the near term. Bank of America (BoFA) is forecasting three rate hikes of 25 basis points in September, October and December, while Deutsche Bank expects two rate hikes in September and December.
As of this writing, money markets are placing a probability of around 45% for the Fed to raise interest rates at its July 29 meeting, according to Prime Terminal data.
This week, investors will focus on the S&P Global Flash PMI data as well as the US housing sector report.
In addition, the first quarter 2026 Gross Domestic Product (GDP) data, Core Personal Consumption Expenditure Price Index (Core PCE) and initial jobless claims to be published on Thursday are expected to be the main drivers of market direction.
