Trade of the Week: Gold to retest $1700 support?

At the start of this new trading week, spot gold has been dragged down to closer to the $1700 mark, although prices have trimmed losses at the time of writing.

 

And depending on how this Friday’s US nonfarm payrolls report turns out, the precious metal could retest that psychologically-important level for support.

 

Why has gold tumbled again?

The precious metal is clearly wilting in the wake of the scorching US dollar and the uptrend in Treasury yields.

These moves (gold down, dollar/Treasury yields up) have been fuelled by the latest policy clues out of Fed Chair Jerome Powell’s hawkish speech delivered at Jackson Hole this past Friday.

Here are the key takeaways from his 'hawkish' speech:

1. The Fed is set to persist with sending US interest rates higher.
    
2. US interest rates are set to stay higher "for some time" (as in, the Fed isn't likely to unwind its rate hikes in a hurry, as some segments of the markets had predicted up until recently).

NOTE: The word 'hawkish' here means that the Fed appears to prefer more of those supersized rate hikes (think 75-basis points per policy meeting) in a big to stamp out red-hot inflation, which is already at its highest in 40 years.

 

The thought of higher US interest rates heralds more downside for gold, as investors are likely prompted to ditch the zero-yielding asset (which means investors do not generate income from holding on to bullion) in an environment when US rates are set to move higher and at a faster pace.

Also recall that gold has an inverse relationship with the US dollar and Treasury yields. Hence, with the latter two rising in tandem with heightened expectations for more Fed rate hikes, that also exposes gold prices to more declines.

 

What does the upcoming US jobs report have to do with gold prices?

Depending on the demonstrated strength of the US jobs market, that would inform the Fed as to how high it could send US interest rates.

• A still-resilient US labour market would essentially give the green light for the Fed to send its benchmark rates even higher. In turn, that should heap more downward pressure on gold.
   
• Signs that the US labour market is starting to creak under the weight of higher interest rates may force the Fed to adopt a more gradual approach with its rate hikes; potentially spelling some relief for gold.

 

What to look out for in this Friday’s US jobs report?

As things stand, markets are forecasting the following:

• US labour market added a further 300,000 jobs in August, going by the headline US nonfarm payrolls (NFP) figure. If so, that would mark a 20th consecutive month of job gains.
  However, an official print of 300k would also mark its lowest number of jobs added since December 2019.
   
• The August unemployment rate would stay at 3.5% - at its pre-pandemic lows.

Overall, the US jobs market is expected to remain resilient in August, even though the Fed has been hiking interest rates since March.

READ MORE: What are nonfarm payrolls and why do markets care (March 2022 article)?

 

How might gold react to the upcoming NFP?

1. If the US labour market adds more jobs than the forecasted 300k figure, while the unemployment rate remains at 3.5%, that could lead to more declines in gold prices.

Potential support levels:

• $1712: using the downward trendline that has gone from resistance to support level.
   
• $1700: stronger support should arrive at this psychologically-important line, noting that previous dips below $1700 have proved short-lived in recent years.

 

2. However, if the momentum in US jobs growth is showing signs of slowing drastically (much lower than 300k and a substantial increase in the unemployment rate), that may force the Fed to adopt a more ‘gradual’ approach with its rate hikes so as not to push the US economy into a deep and protracted recession.
   
   That is to say policymakers may be more comfortable with triggering rate hikes that are relatively smaller than the 75bps hikes it has already triggered at each of its past two policy meetings.
   
   Such a narrative could then prompt a short-term rebound in spot gold.

Potential resistance levels:

• $1764: around 50-day simple moving average (SMA)
   
• $1800: stronger resistance set to arrive at psychologically-important mark

 

In summary:

Markets are currently forecasting a slightly higher chance (21.5%) of spot gold touching $1700, rather than prices reaching its 50-day SMA (20.8%) around $1764.

Ultimately, gold’s performance this week will likely depend heavily on how the official figures from this Friday’s US nonfarm payrolls report stack up against market expectations, and what it means for the Fed’s path forward with US interest rates.

 

Gold XAUUSD Bullion Fed rate hikes Fed Chair Jerome Powell Jackson Hole inflation Recession US jobs report Nonfarm Payrolls