Surprise NFP Could Fuel Gold

Economists expected US employment data to show labour-market resilience, justifying the Fed's stance to keep rates higher.

Keeping a Watchful Eye

Friday's release of the NFP report is expected to shed light on recent indicators and how the US labour market performed. The Fed is closely monitoring the jobs market as core inflation has stagnated above target and headline inflation reached a five-month high in December. The latest JOLTS report for December showed a large drop in job openings, falling to 7.6 million from the expected 8 million. However, the ADP on Wednesday showed an increase in jobs in January when compared to December, driven by high service sector demand. Nonetheless, markets generally do not view ADP as a reliable predictive tool for official data released later in the week.

The consensus expectation is that jobs will come in at 205,000 in January from the 256,000 reported in December, but this is still considered to be a strong number. Average hourly earnings are expected to sustain their growth pace above the inflation rate at 3.9%. The unemployment rate is also expected to stay unchanged at 4.1%. Markets are looking for signs that the labour market remains tight, suggesting that labour costs will continue to wield inflationary pressures and justify the Fed's decision to keep rates unchanged.

Offsetting Tariff Impacts?

The market has been mostly focused on the impact of tariffs over the course of the week, with the data release providing an opportunity for traders to shift focus back to fundamentals. However, analysts suggest that the Administration's push to lower immigration while enforcing pro-business policies that have raised business optimism could encourage increased hiring and fuel price pressures. Markets have largely interpreted the Fed as adopting a more hawkish stance, pushing forward expectations for the next rate cut until June.

Participants will want to see if hiring and wage growth have indeed accelerated in January or if the JOLTS report and Q4 GDP figures were early signs that the labour market is not as tight as it seems. Moderate growth in hiring could provide support for gold as it has probed new record highs this year, buoyed by tariff concerns and the potential for rising inflation. If the NFP beats expectations, it could raise inflation fears and boost gold. Conversely, a disappointment could bring more dovishness back into the Fed arsenal, which could also support gold.

Measured Move Hints at New Records

The ascending triangle pattern left behind on gold suggests a measured move target of $2950 per ounce, extending the $2790-$2540 leg from the breakout point of $2700. Currently in the fourth, corrective wave, the end of the short-term decline from the record peak of $2885 could set the stage for one more leg to the upside to complete the final wave of a 5-wave move. In commodities, the fifth and final wave is typically the longest of a 5-wave impulse. On the other hand, losing support at $2830 could signal the completion of this short-term upward move.

Source: SpreadEx / Gold

Key Takeaways

The Friday NFP is expected to provide clues about the strength of the US labour market, which is known for influencing Fed policy. An upside surprise could support the restrictive bias maintained by the Fed over the past few months, while a poor set of data could trigger a dovish stance. Gold prices might move upwards or see a pullback, depending on how markets interpret the impact the report may have on inflation and future rates.