US March NFP To Test Fed Hawkishness

Gold has trended higher this week on hopes that the war with Iran could be over soon, as markets price out some of the risk of a Fed hike and as underlying economic data carries more weight.

What Could Move the Market

• US March NFP is expected to rebound, with 60K adds and the unemployment rate returning to 4.4%, making February's dismal number an outlier.
• The labour market in the US showed growing weakness through March amid uncertainty from the war.
• Gold prices have been climbing lately amid optimism that the US could end its attack on Iran in a couple of weeks.

Gold Rising on War End Optimism

The market has been largely dominated by the war in the Middle East, with traders worried that higher crude prices will push up inflation. If the situation isn't resolved soon, the Fed might be forced to tighten even if the jobs market is under pressure. But if crude prices rise enough, they could cause the economy to falter, potentially leading to a decline in inflation through demand destruction. This is a fancy way of saying that if crude prices are high enough for long enough, a recession could occur. That would force the Fed to cut rates. Yields on Treasuries have fluctuated with investor outlook on the war and this week have trended lower as traders hope that a hike won't be necessary. Some analysts contend the drop reflects the market pricing in the risk of a recession, while others argue it reflects hope that the conflict will be over soon. In either case, the state of the economy and the job market play a major role in the Fed's outlook.

A week ago, markets were pricing in a 70% chance of no rate hikes this year, with a 20% chance of a hike. The odds of keeping policy unchanged remain unchanged, but dissenters have now switched to predicting a rate cut. This easing in the Fed outlook has contributed to a rise in gold over the last few days, with the yellow metal rising to just shy of $4,800 on Wednesday. This option could get further support if the upcoming job numbers surprise, like they did last month.

Job Numbers Expected to Rebound

February's jobs figures were significantly below expectations, showing a loss of 92K jobs and the unemployment rate ticking up to 4.5%. However, developments in the war completely overshadowed the release. This time around, markets will be closed on Friday when the NFP figures come out, which means the reaction might not come until Monday trading, giving investors time to digest and interpret the data.

The consensus is for NFP to show 60K jobs added and for the unemployment rate to tick back down to 4.4%, implying that the February figures were an outlier. However, over the last month, there have been increasing signs of growing weakness in the US jobs market as higher energy prices and uncertainty reduce hiring. This means that the March data could come in below expectations and jolt the market back into pricing rate cuts. After all, even after WTI rose to triple digits last month, the Fed did affirm its expectations of a rate cut for this year. A return to an easing bias would likely provide further support for gold. However, the context of developments in the Middle East over the extended weekend will play a crucial role in this.

Gold in Corrective Price Action

Despite rising from $4100, the price action resembles a corrective flag pattern. If gold bears push prices below the lower end of the flag near $4500, they will expose $4350, $4250 and $4100. On the flip side, if the current 4-hour pinbar candles lead to higher prices with $4600 holding firm, bulls could reclaim the $4800 peak, eventually paving the way for the $5k handle.

Source: SpreadEx | Gold, 4-hour Chart