(Kitco News) With the surprisingly strong US employment situation, the Fed will not be pivotal from the severe tightening cycle in September, which will hurt gold in the short term, according to analysts. The focus next week will be on the upcoming inflation figures.
Gold lost 1% in response to the US economy adding 528,000 jobs in July, significantly beating expectations of 250,000. At the time of writing, December gold futures are trading at $1,788.90 after rising above $1,800 an ounce on Thursday.
“The employment numbers surprised today, and the idea that the Fed could be aggressive with raising rates hasn’t helped gold prices,” Frank Colley, chief market analyst at RJO Futures, told Kitco News.
Last week, there was a great deal of confidence in the market that the Fed could focus early on its large interest rate increases due to the slowing economy. All that changed this week, especially with the strong employment report, said Edward Moya, chief market analyst at OANDA.
“This is a game-changer. The amount of confidence the Fed will focus on has been very high. Some even predicted it could happen as early as September. Now, the focus is shifting to whether the Fed will need to be more robust. Gold Moya said Kitco News: “It will struggle only here as expectations for rate hikes next week will strengthen.”
He noted that the market’s re-pricing of its expectations from the Federal Reserve towards a significant increase in interest rates is a challenge for gold.
This is especially true after gold tried and failed to rise above $1800 this week. “It looks like gold might try to stabilize above it. It’s going to be hard for gold to keep going. It went from $1,700 to $1,800 in one direction, and it looks a bit exhausted here,” Moya noted.
He added that the decline in gold on Friday does not mean the return of big selling to 1,700 dollars an ounce. “The area between $1750 and $1,770 is a good support level for gold,” Moya said.
From a technical perspective, Cholly sees a lot of buyers entering at the $1735-1750 level. On the resistance side, it is important for gold to close above $1,800 an ounce, which is when Cholly becomes more bullish.
“I don’t think we will see $1700 again because of the support there, but for the bulls to come back, gold has to close above $1800. And if gold can break through the $1800 level to $1,812, the buying will get aggressive, and we will have no problem in Reach $1850-75. That’s where the momentum comes in.”
Focus on inflation numbers
Most of the attention next week will be on the US inflation report for July, with economists expecting the annualized CPI to come in at 8.7% after accelerating to 9.1% in June. Any surprises above those expectations will be negative for gold.
“Next week will be all inflation related, and price pressures may be very hot. This indicates that Treasury yields could rise further, and the US dollar will do well next week,” Moya noted. “Markets will be nervous here that the bond market sell-off could intensify, which is never a good fit for interest-free gold.”
Analysts warned that if inflation turns hotter than expected, markets will expect a 75 basis point rise in September and even start pricing in a 100 basis point move.
At this point, any positive macroeconomic news is bad news for the market due to expectations about what the Federal Reserve will do in response, Gainesville Coins precious metals expert Everett Millman told Kitco News.
“The stronger the economy looks, the more aggressive the Fed will have to be with rate hikes. For example, if jobs are struggling, the Fed will be more inclined to pivot and slow rate hikes or even stop. But any good economic news pushes the dollar to rise”.
Millman also reminded investors that data sets are often revised in the following months, which can happen to strong employment numbers from July through to upcoming inflation numbers.
Next week’s data
Wednesday: US Consumer Price Index July
Thursday: US Producer Price Index for July, Unemployment Claims
Friday: Michigan Consumer Confidence in August
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