Gold Soars Ahead of US July NFP

Investors are expecting another soft print in the labour market, which could bring attention back to the state of the economy after disappointing GDP data, but will it be enough to change the Fed’s rate path?

What the Market Is Looking At

• Markets are expecting a tepid rebound in the US jobs market that could keep the Fed on course for a rate hike later this year.
• Odds of a rate hike at the next meeting have fallen noticeably since the pause in fighting in the Middle East.
• Uncertainty over the trajectory of rates and falling labour force participation could lead to increased volatility when the data come out.

Still Cooling, or Green Shoots?

The consensus among analysts is that the US labour market had a tepid rebound in June, which would affirm the Fed's current outlook. Recently, the odds of a Fed rate hike at the September meeting have been declining as lower energy prices are seen as posing less of an inflationary threat. A week ago, the odds were two-thirds in favour of a rate hike, but now futures are pricing in about a 50-50 chance. This means that a beat or miss on the NFP data due on Friday could have a bigger effect on the market, as it shifts the odds back in favour of a hike or undermines the hawkish narrative. NFP figures have also been particularly volatile recently, with significant adjustments to prior data also driving the market. All of these point to the high possibility of volatility after the data comes out.

One issue traders are likely to focus on is whether the data signal a rebound or a continuation of the decline. June NFP came in at 57K and is anticipated to rise to 76K in July. This is well below the 180K range considered replacement level, indicating continued weakness in the jobs sector. But a rebound would be in the right direction for the Fed to keep focusing on inflation after hiring picked up in June and layoffs remained low. If that rebound doesn't happen, the labour market could become a major concern for the Fed, cutting the odds of a rate hike. Another important factor is that last month's reading showed the unemployment rate unchanged, driven by a large drop in the participation rate. An increase in the number of people looking for work, whether hiring has increased or not, could raise the unemployment rate and make the Fed more dovish.

Gold Already Rising

Easing geopolitical tensions has allowed gold to jump to a seven-week high ahead of the Non-Farm Payrolls. The dollar has remained largely stable in the interim, as there still isn't actual progress towards resolving the conflict in the Middle East. This indicates that gold is largely moving with shifts in expectations about the Fed. A beat on NFP could shift the market back to pricing in a September rate hike, which would pull down gold prices. However, the market appears to be moving mostly on the geopolitical aspect and not pricing in a miss in the jobs data. A substantial miss in the jobs data could give the yellow metal a second wind going into the weekend. 

Gold Eyes Major Trendline After 200-Dollar Rally

Following yesterday's 200-dollar rally to $4250, gold managed a breakout above the upper VWAP at $4220, making it an important support level alongside the prior peak at $4200. If bulls can sustain momentum, given the RSI has room to move higher, the next resistance sits at $4380, which might align with the descending trendline extension. However, if the breakout fails and the yellow metal falls below the middle VWAP at $4070, gold might revert to the $4K handle, paving the way for a low at 3940.

Source: SpreadEx | Gold, Daily Chart