XAU/USD has rebounded as traders buy the dip after the release of Initial Jobless Claims data showed less Americans are signing on for unemployment benefit than experts had forecast, led to a spike lower. The pair is currently trading up on the day at $1,982.
Gold price shot higher following the March FOMC meeting on Wednesday. The ore beloved of king Midas of Phrygia rose after the US Federal Reserve (Fed) suggested tighter credit conditions due to banking stress might do the job of bringing down inflation on its behalf. The Bank would, therefore, probably not have to raise rates as much as expected in the future.
Gold gained because the expectations of lower interest rates are viewed as bullish for the metal since it doesn’t yield holders a return unlike cash (deposits) or cash equivalents.
XAU/USD dipped lower after the release of stronger-than-forecast labour market data, on Thursday.
Initial Jobless Claims data for the week ending March 17, showed a lower-than-expected rise in the number of Americans claiming unemployment benefits to 1.694M versus the 1.701M forecast. The data suggests the labour market is stronger than economists anticipated, which could mean upwards pressure on inflation, and the possibility the Federal Reserve may have to raise rates more aggresively than the dovish interpretation of Wednesday’s FOMC might suggest.
The next key release on the economic calendar for XAU/USD is likely to be US Durable Goods Orders, which track the sale of big ticket items. This data is scheduled for release on Friday, March 24, at 12:30 GMT, and is expected to show a 0.6% rise MoM in February from – 4.5% previously. Durable Goods Ex Transportation and ex Defense give a core figure which will also be of interest to investors – the former is expected to rise 0.2% and the latter by 0.0%.
For Gold, the key takeaway will be whether the data shows contiued strength in the US economy. A beat of expectations would suggest growth is bouyant and, given the strong labour market data on Thursday, may add to the case that inflation will stay high, necessitating even higher interest rates from the Federal Reserve to combat it. As we have said this is bearish for Gold. If the data fails to meet expectations, the opposite is likely to happen and Gold will continue rising.
At its FOMC meeting on Wednesday, March 22, the US Federal Reserve increased the Fed Funds Rate a quarter of a percent to a target range of 4.75%-5.00%, in line with market expectations, raising the base interest rate at which banks lend to each other.
Whilst this would have normally been expected to be bearish for the Gold price, it had already been priced in by markets as a base case scenario.
The Fed’s Summary of Economic Projections (SEP), published at the same time as the decision, however, showed a lower-than-previous future rate hike trajectory in the dot plot. The Fed now forecasts a terminal rate of only 5.10%, just above the current range, and it was this that began pushing Gold price higher.
In addition, the Chairman of the Federal Reserve, Jerome Powell, stated in the press conference after the meeting that it was possible the Fed might not need to raise rates as much as expected, because the credit crunch caused by the banking crisis would do the work for them. This further drove Gold higher.
“Possible tightening in credit conditions may mean monetary tightening has less work to do,” said Powell.
From a technical perspective, the uptrending move that began at the start of March remains intact, reflected in the 4-hour chart below.
Gold price: 4-hour Chart
Since ‘the trend is your friend’, the probabilities support a continuation higher, with a break above the $1,984 highs of the previous bar confirming an extension.
The underside of the just-broken trendline is likely to present an initial target and resistance at $1,991 and the Gold price will probably pullback at that level, however, an eventual rally all the way to the yearly highs at $2,009 is quite possible.
According to FXStreet Senior Analyst Dhwani Mehta, XAU/USD is forming a bullish continuation pattern and is ready to retake $2,000. A daily candle stick close above the falling trendline resistance at $1,975 would be required to validate the pattern.
“An upside break will call for a test of Tuesday’s high at $1,985, above which the $2,000 round figure will get challenged.”
“On the other side, if Gold bulls fail to sustain at higher levels, any retracements could prod the intraday low at $1,965, below which the static support at $1,960 will be threatened. Deeper declines will expose the $1,950 demand area, opening floors for a test of the falling trendline support at $1,926,” adds Mehta.
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EUR/USD rose further during the American session, boosted by a weaker US Dollar. The Nonfarm Payrolls report came in below expectations and weighed on the Greenback. The pair reached a five-day high at 1.1042.
GBP/USD climbed toward 1.2800 on Friday supported by a weaker US Dollar across the board. The pair is still down for the week but it is off weekly lows. During the last two days it gained more than 150 pips.
Gold price climbed above $1,940 in the American session on Friday. The benchmark 10-year US Treasury bond yield erased its daily gains following the US July jobs report, which showed a less-than-expected 187,000 increase in Nonfarm Payrolls, and helped XAU/USD gains traction.
An increase in selling pressure on the US Dollar could catalyze a rally in Bitcoin, pushing the asset past the psychological barrier at $30,000. The Greenback weakened after the US jobs report.
Nonfarm Payrolls failed to provide a straightforward narrative for investors, and not for the first time. The US Dollar is set to fight back after the initial blow.
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