Markets Price in Longer Fed 'Pause' After NFP

Markets are becoming increasingly convinced that the Fed will hold rates steady for longer, but this hasn't stopped gold from turning higher.

Pushing Rate Cuts Further Down the Road

Markets are largely expecting no change in interest rates from the upcoming FOMC meeting. However, there has been a change after the latest NFP showed stronger-than-expected job numbers. Before the data print, the markets were pricing in a two-thirds chance of a rate cut at the June meeting. But the NFP report has flipped the situation. Futures are pricing in a more than two-thirds chance that interest rates will remain unchanged for the next two meetings. Despite the negative Q1 GDP print and pressure from President Donald Trump, analysts believe the sticky CPI figure and strong job market growth will persuade the Fed to 'hold' for longer.

Typically, the Fed likes to signal its policy changes to the markets beforehand. Until the NFP report last Friday, markets expected Fed Chair Jerome Powell to hint at easing after the two-day FOMC meeting concludes on Wednesday. However, the new scenario implies that the Fed and Powell will likely stick to the "wait-and-see" rhetoric from the last meeting and subsequent appearances. Powell and other FOMC members have consistently argued that tariffs would likely slow the economy and raise prices. Although some Fed officials acknowledge that tariff-driven inflation would be temporary, a tight labour market and inflation staying above target would likely outweigh economic concerns, at least in the short term.

How Long Can They Wait?

The Fed has been on a "pause" in its easing cycle since January, after cutting rates hurriedly in the final quarter of last year amid signs of an already decelerating economy. This means the next move is projected to be a rate cut; it's just a matter of when. While the market has soured on the prospect of a near-term rate cut, the expectations of a slowing economy, which can easily generate deflationary pressures that outweigh import price increases, have many analysts betting the Fed will be cutting rates faster than anticipated towards the end of the year. The Fed itself is still projecting just two rate cuts this year.

A shift towards expecting hawkishness from the Fed would normally be expected to weaken gold prices, as gold usually suffers when interest rates rise. However, demand for safe havens seems to continue to outweigh interest rate considerations, as the market also remains in a wait-and-see mode around the tariffs. The latest uptick in gold might not be a reflection of something happening but rather due to the lack of talk about advances in trade negotiations. Eventually, traders might get tired of officials saying trade deals are 'close' and react to the upside if the White House doesn't deliver on deals.

Gold Eyes Record After Correction End

After possibly ending a correction at $3200 per ounce that involved a triangle pattern, gold has started to move towards the record peak of $3500. If bulls reclaim the $3400 and $3450 levels in the short term, gold may reclaim the top and even extend to $3550 and $3600, both round levels higher up. However, losing the $3320 support will increase the risk of breaking below regional support at $3170 and may open the door to $3060.

Source: SpreadEx / GOLD

Key Takeaways

The markets are pricing in a Fed 'pause' at this and the next FOMC meeting following solid jobs data last Friday, with the central bank expected to maintain a "wait-and-see" approach, at least in the short term. However, expectations of a slowing economy and deflationary pressures could prompt the Fed to cut rates faster than anticipated towards the end of the year. Meanwhile, gold prices have been supported by safe-haven demand, with the precious metal possibly having ended a correction pattern and eyeing new highs.