Gold Index Bounces Back As Traders Anticipate Bearish USD On NFP Data

Gold has found some bidders again after a quick but short trip to the downside on Thursday. At $1,805, the yellow metal is about flat again on the day as traders now get their sights on Friday’s Nonfarm Payrolls data.

Gold was hit hard on the back of a spike in US Treasury yields and the lingering anticipation around the Federal Reserve’s telegraphed interest rate hike in March. Not only that, the Bank of England and the European Central Banks are firming up on their own monetary policy which is raising the opportunity cost of holding non-yielding gold.

While the ECB held on Thursday, comments from ECB president Christine Lagarde opened the door to market speculation for a tightening of its monetary policy. Lagarde acknowledged that inflation was running hotter than expected and with risks tilted to the upside.

When she was questioned over whether the ECB was “very unlikely” to raise rates this year, Lagarde said it would assess conditions very carefully and be “data-dependent”. This leaves March as a key meeting where the ECB could signal an even more hawkish stance. BoE raised interest rates to 0.5% and nearly half its policymakers wanted a more significant increase to contain rampant price pressures.

However, besides the hawkishness at central banks, the US dollar has come unstuck this week from the Fed-bid. Instead, it has been sold heavily following less hawkish remarks at the start of the week from a chorus of Fed officials, weaker jobs data and a slide in ISM services from the prior month. Risk appetite has also come crawling back into global markets, consequently weighing on the greenback that fell below 96 DXY on Thursday.

The focus will now be on Friday’s Nonfarm Payroll. Payrolls likely plunged in January, but only because of temporary Omicron fallout. Nonetheless, traders will be cautious that while the Federal Reserve is expected to look through any near-term weakness in the labour market, and subsequently hikes in March regardless of tomorrow’s jobs data outcome, so if labour market weakness persists for a couple of months beyond this, then the Fed will rethink its likely rate path.

On a slightly more bullish take, analysts at TD Securities explained that several Fed officials have already made clear that they will discount weak data as temporary. Also, we see upside risk on average hourly earnings, with an already strong trend likely to be added to by temporary Omicron effects relating to the composition of payrolls and the length of the workweek. Our 0.6% MoM estimate for hourly earnings implies 5.3% YoY, up from 4.7% YoY in December.

Gold lost more than $10 in a few minutes after breaking under $1800. XAU/USD bottomed at $1788, reaching the lowest level since Monday. It remains under pressure near $1790.

The decline took place even as the US dollar drops sharply. The DXY is down 0.45%, trading at 95.55, the lowest since January 20. In Wall Street the red dominates. The Nasdaq tumbles 2.15% and the Dow Jones drops by 0.85%. The deterioration in risk sentiment is not help for metals.

Higher US yields and technical factors pushed XAU/USD to the downside. The 10-year jumped from 1.78% to 1.84% in a few hours, while the 30-year yield rose to 2.18%, the highest level in a week.

The $1800 was a relevant intraday support. After breaking lower, gold accelerated to the downside. As of writing, it is testing the $1790 area, another relevant technical level. A daily close below should clear the way to more losses, exposing the next support at $1780 (Jan 28 low).

If XAU/USD manages to hold above $1790 it could rebound. A recovery above $1800 would alleviate the bearish pressure. The next resistance stands at $1810.

Gold fluctuated as investors weighed the path of central banks’ monetary tightening and mixed US economic data. European Central Bank President Christine Lagarde is no longer ruling out an interest-rate hike this year, a pivot toward the tightening stance of global peers that officials privately see materializing with a shift in policy guidance as soon as next month.