Gold saw its impressive six-week rally snap spectacularly last week after the US labour market showcased once again its robustness and prompted traders to reassess their scenario for a less hawkish Fed going forward. In this report we aim to shed light on the catalysts driving the precious metal’s price, assess its future outlook and conclude with a technical analysis.
The gold market doesn’t want to hear it
Last week the Federal Open Market Committee voted and delivered a 25-basis points rate hike in line with broader expectations, lifting the key policy rate at 4.75% and according to the December dot plot the central bank is now just shy of 50 basis point away from the terminal rate of 5.25%. In its accompanying statement the bank once again highlighted its resolve at further tightening its monetary policy stance in order to achieve sufficiently restrictive levels, which aims at containing rogue inflationary pressures from becoming deeply entrenched within the US economy. Even though the stance adopted by the Fed was clearly hawkish, the market’s reaction to the decision was unequivocally dovish, exacerbating the divergence between what the Fed communicates and what the market interprets, apparent since the start of the year. This leads us to believe, that the market places more weight on incoming data in its assessment, rather than taking the Fed’s guidance for granted. The view for a less hawkish approach from the market could be predicated upon the better-than-expected growth results in the past quarter alongside the latest data on the inflationary front, indicating that inflationary pressures have eased further from their peak, igniting optimism that the US economy may avert a recession or at the very least experience mild recession symptoms. Therefore, market participants held onto their bias and decided to fight the Fed’s explicit comments that signaled more must be done to contain inflation. Hence, the dovish interpretation kept the dollar suppressed and allowed gold to climb to higher ground, peaking around the $1950 level after the decision.
Outstanding NFP data dampens the shiny metal’s appeal
Market participants however, were forced to alter their assessments after a blowout employment report on Friday, which showcased once again that the labour market remains robust albeit a high interest rate environment. More specifically, Non-Farm payrolls unexpectedly rose to 517k in the month of January, obliterating forecasts for a slowdown to 185k. Equally the average hourly earnings rose to 4.4% beating estimates of 4.3% while the unemployment rate fell to five decades lows, being reported at 3.4%, below expectations for a rise to 3.6%. The results practically reaffirmed the Fed’s view that interest rates will stay higher for longer, as job growth accelerated sharply in January and broadcasted that the employment market is yet to show any cracks. As a result the precious fell sharply from its nine-month highs as the dollar gained traction. Moreover, the better-than-expected ISM non-manufacturing PMI figure, which rebounded from contraction territory in January and returned to growth, provided extra support for the dollar and aggravated gold’s fall. Also, the benchmark 10-year treasury yield rose from its temporary fall to the 3.4% level after the “dovish” Fed decision and reclaimed the 3.6% level after the stellar employment report, nudging investors to reassesses their prospects for a Fed pivot in the second half of the year. Lastly, we would like to note Fed Chair Powell’s speech later today and it would be interesting to see whether he would press on with his hawkish narrative. Should that be the case we may see some support for the dollar and gold relenting more ground.
XAUUSD H4 Chart
- Support: 1860 (S1), 1840 (S2), 1820 (S3)
- Resistance: 1880 (R1), 1900 (R2), 1920 (R3)
Looking at XAUUSD 4-hour chart we observe gold’s price peak around the $1960 level during last week after the Federal Reserve delivered its first interest rate hike for the year. However, after a robust employment report of Friday, gold prices were on the retreat, falling sharply from their nine-month highs. We hold a sideways bias for the precious being confined between $1860 (S1) support base and $1880 (R1) resistance level, given that the price action broke above the descending trendline. We note nonetheless that the RSI indicator below our 4-hour chart registers a value of 35, indicating that a bearish sentiment surrounds the bullion. Should the bears capitalize on the negative momentum, we may see the price action break below the $1860 (S1) support level and move lower closer to the $1840 (S2) support base. Should the bulls take over, we may see the break above the $1880 (R1) resistance level and the move closer to the $1900 (R2) resistance barrier.
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