Gold Could Break on NFP Softening

With inflation moving in the right direction, the Federal Reserve appears to be zeroing in on labour data to determine when it might start its easing cycle, providing a potential opportunity for a gold breakout.

Getting a Handle on Interest Rates

The price of gold has remained steady since April, when the market revised its outlook for interest rate cuts. Interest rates are a main driver of gold prices, with lower rates typically increasing the price of the yellow metal. However, there is currently some uncertainty around the timing of future Fed actions in regards to easing policy, limiting further upside. Political factors may also come into play as elections are near, with analysts predicting interest rates will be higher if former US President Donald Trump gets reelected.

Last week, interest rates rose briefly but then retreated following reassuring comments from Fed Chair Jerome Powell at the ECB banking conference in Sintra. He stated that progress had been made to address inflation, giving markets hope that the anticipated rate cut in September would proceed as planned. With this resolved, analysts note the Fed is now focusing more on examining labour market data to determine if inflationary trends are finally subsiding. The tightness of job markets in the post-pandemic era was seen as a key driver sustaining demand and inflationary pressure.

What Could Move The Needle

Markets will likely be reassured if the upcoming NFP data shows softer employment growth. However, another surprise increase in employment numbers, especially if accompanied by higher average wages, could leave markets concerned that the next rate cut will be delayed. This could support the US dollar and weigh on the price of gold. As data has emerged over the last week, the consensus forecast for the number of jobs created last month has been rising, starting at an initial projection of 160,000 and now averaging around 200,000. Still, this remains well below the 272,000 jobs reported for May.

The unemployment rate is expected to remain unchanged at 4.0%. However, hourly wage growth is seen slowing to a monthly 0.3% from the previous 0.4%. This would bring the annual wage growth rate to 3.9%, down from 4.0%. While still above the latest CPI of 3.4%, wages are trending lower and closing the gap with inflation. This could convince policymakers that they can start moving toward easing, providing the boost needed for gold to break out of its range.

Gold in Running Triangle

The medium-term price structure of gold seems to be somewhat symmetrical, albeit narrowing, with the regional low of $2300 per ounce potentially being the bottom, especially if upcoming employment figures are weaker than expected. Moving past $2380 and $2405 may provide the impetus for prices to rise towards $2460 and ultimately target $2540, as projected by the measured-move method. However, the triangle may take longer to conclude if buying demand wanes or prices move in the opposite direction, with a decline below $2330 and $2290 kicking the door to $2250 and $2150 wide open.

Source: SpreadEx / GOLD

Key Takeaways

With inflation trends stabilising, the Fed is monitoring labour data closely to determine the appropriate timing for easing. Although lower rates generally support higher gold prices, some uncertainty remains around the Fed, with the upcoming NFP watched closely for signs of moderating job growth and wage inflation that could justify a September cut. Softer jobs and wages could provide the conditions for gold prices to break higher.