Gold reversed course last week retracing its steps back to the $1660 level, after the dollar reinstated its position as the preferred safe haven asset of the market. Weighing the precious further was the resurgence of bond yields climbing near their highs after their recent hiccup and Fed’s policy makers’ hawkish remarks. In this report we aim to shed light on the catalysts driving the precious metal’s price, assess its future outlook and conclude with a technical analysis.
Upside surprise of US employment data lifts the dollar
The greenback managed to string five consecutive days in the greens earlier today, riding the momentum wave after the better-than-expected employment report results for September, that hit the market last Friday. The Non-Farm payrolls figure saw a positive surprise to the upside, with the US economy adding 263k jobs in September, exceeding expectations of 250k which was estimated prior to the release. The figure implies that the US labour market retains its ability to create new jobs amidst widespread fears of economic slowdown and gives confidence to Fed to press on aggressively, focusing solely on taming the persistent problem of inflation. Furthermore, the employment report pinpointed to the fall of the unemployment rate back down to the 3.5% level, showcasing the tightness of the US employment market. On another note, US treasury yields also extended their winning streaks after the data release, pressuring gold prices, contributing further to the pullback of the yellow metal. More specifically the benchmark US 10-Treasury yield is trailing upwards towards the 4% level, currently trading at 3.93%, a level once seen before during 2008. Even though, gold is considered a hedge against inflation and economic uncertainties, rising rates reduce the non-yielding bullion’s appeal, as it dampens its shine as a store of value.
Fed policy makers’ hawkish remarks restated
During a speech yesterday, Fed’s Vice Chair Brainard once again clearly stated the need for restrictive monetary policy, for a prolonged period of time, to ensure that inflationary pressures are indeed brought down to an acceptable level, acknowledging the fact that it may bring also the economy to a grinding halt and push the US economy into a recession. Also, data dependency was another point of reference made by the Vice Chair and since the favorable results of the recent employment report showcase tightness in the US labour market, it could provide extra confidence to the Fed. Given, the statements from the Vice Chair and several other FOMC members during the past week the market appears to have digested the Fed’s intentions for hiking by another 75 basis points in the November meeting and currently the FFF imply an 89% probability for such a scenario to materialize. Furthermore, market participants await in anticipation the high impact inflation print to be released on Thursday and an update on consumer spending tendencies to be showcased by the latest Retail Sales report for September which is expected on Friday. We would also like to point out the scheduled speeches from Philadelphia Fed President Harker, Cleveland Fed President Mester, Minneapolis Fed President Kashkari, Fed Board Governor Bowman and Kansas City Fed President George throughout the week, all of which will be monitored for any deviation from the main rhetoric. Also we highlight the release of the Fed’s last meeting minutes and should the tone of the contents continue to be tilted on the hawkish side, we may see the release providing additional support for the greenback. Should the speeches continue to deliver the as expected hawkish undertone, we would expect seeing support for the dollar and gold to remain prone for downside due to their inherent negative correlation.
CPI print due out on Thursday
The US inflation report is due out this Thursday and market participants will be looking for a status update on the ravaging inflationary pressures that spread discontent and fear across the US economy. According to estimates, the month-on-month CPI rate for September is expected to rise to 0.2% compared to the 0.1% reported last month and should the actual figure meet expectations, the uptick of inflationary pressures on a monthly basis could give confidence to the Fed to continue aggressively with its monetary policy tightening agenda, opting for another 75-basis points hike, in their November meeting. On the other side of the spectrum however, the year-on-year CPI rate for September, is expected to ease to 8.1% compared to the 8.3%, of the previous reading of August. Should the actual rate meet the expectations, with the yearly inflationary metric pointing to an easing of inflationary pressures, could lead the Fed to opt for a smaller rate hike. All things considered however, the yearly CPI rate of 8.1% is still well above the 2% inflation target set as a benchmark from the central bank and the multitude of recent speeches from Fed policy makers reiterating the need for squashing inflation by keep hiking rates, we hold the view that the Fed will stay on course and move aggressively with its tightening plans. Therefore, in our assessment, gold continues to be disproportionately predisposed towards the downside on a fundamental level, as the dollar continues to receive safe haven inflows amidst a grim global economic outlook.
Technical Analysis
XAUUSD H4 Chart
Looking at XAUUSD 4H chart we observe the breakdown from the ascending trendline which was initiated on the 28th of September and the price action moving lower after the better-than-expected employment report results last Friday. We hold a bearish outlook bias for the precious given the break of the ascending trendline and supporting our case is the RSI indicator below our 4-hour chart which currently registers a value of 31, highlighting the negative sentiment surrounding the bullion. We must note however that RSI move below the 30 oversold threshold may be due a correction. Should the bears maintain control, we may see the break below the 1660 (S1) support level and gold moving near the 1642 (S2) support base. Should the bulls take over, we may see the break above the 1680 (R1) resistance level and the price action moving closer to the 1700 (R2) resistance barrier.
