- Gold trims some of last week’s losses, posts gains of over 0.50% despite USD strength.
- US Nonfarm Payrolls report shows resilient labor market with 272,000 jobs added.
- Upcoming US inflation data and Fed decisions are likely to impact Gold’s future trajectory.
Gold posted solid gains on Monday, rising more than 0.50% as US Treasury yields climbed. Although the yellow metal exchanged hands above last week’s low of $2,277, it is on the defensive amid broad US Dollar strength ahead of the release of crucial US economic data. The XAU/USD trades at $2,311 at the time of writing.
Last week’s US Nonfarm Payrolls for May showed that the labor market remains resilient even though previous reports showed that it was cooling. Nevertheless, 272,000 jobs were created, more than the estimated 185,000. In the same report, the Unemployment Rate rose, while Average Hourly Earnings increased slightly.
Given the backdrop, this week’s inflation report in the US would be crucial. Most analysts estimate inflation to remain at familiar levels, which could reaffirm the Federal Reserve’s (Fed) rhetoric of keeping interest rates “higher for longer.” On the other hand, a reacceleration could prompt Fed officials to adjust their rhetoric, which could pave the way for further losses to the non-yielding metal.
After the US inflation data is released, the Fed will announce its monetary policy decision and update the Summary of Economic Projections (SEP). Any hawkish tilts in the message or the dot plot could trigger volatility among market participants.
In the meantime, the US 10-year Treasury note yield edges up three-and-a-half basis points to 4.47%, a headwind for the yellow metal. Consequently, the DXY, an index of the US Dollar against six other currencies, increased 0.23% to 105.17.
Daily digest market movers: Gold price recovers after strong US jobs report
- News that the People’s Bank of China paused its 18-month bullion buying spree weighed on the precious metal. “Holdings of the precious metal by the PBOC held steady at 72.80 million troy ounces for May,” according to MarketWatch.
- Upcoming US CPI report for May is expected to show headline inflation at 3.4% YoY, while core CPI is foreseen dipping from 3.6% to 3.5% YoY.
- Last week, employment data in the United States spurred speculation that the Fed will keep rates higher for longer.
- Last week’s US data decreased the odds for a Fed rate cut in September, according to the CME FedWatch Tool, from above 50% to 46.7%.
- December’s 2024 fed funds futures contract hints that investors expect 28 basis points of rate cuts by the Fed throughout the year.
Technical analysis: Gold price climbs, hovers around $2,310
Gold price consolidates above $2,300, even though a Head-and-Shoulders chart pattern emerged. Momentum shifted bearishly as shown by the Relative Strength Index (RSI), which has pierced below the 50-midline, an indication that sellers are in charge.
Therefore, further Gold weakness and sellers could push the spot price below $2,300. Once cleared, the next stop would be the May 3 low of $2,277, followed by the March 21 high of $2,222. Further losses lie beneath with buyers’ next line of defense at around the $2,200 figure.
On the flip side, if Gold buyers lift prices above $2,350, look for a consolidation in the $2,350-$2,380 area.
Interest rates FAQs
Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%. If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.
Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.
Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank. If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.
The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure. Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.
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