Gold outlook dimmed by stronger US data ahead of CPI and FOMC

• Gold outlook: stronger NFP and UoM consumer sentiment data undermine metals
• Dollar rises against most currencies but CPI and FOMC are key risk events next week
• Gold technical analysis: Key support at $2000 needs to hold to maintain bullish bias

It was a textbook reaction in gold in response to the stronger jobs and consumer sentiment data, with the metal falling, dollar and yields rising. It fell from around $2020 to a low so far of $2002. While down, it is certainly not out. It was only on Monday when it hit a new record high, albeit a short-lived one. Still, the downside could well be limited, especially if we see more evidence of waning inflationary pressures around the world.

In case you missed it, the headline non-farm payrolls report was stronger compared to expectations, printing almost 200K when 185K was expected. But there was a net downward revision of 35K in the prior two month’s data. This takes some gloss off an otherwise solid jobs report. We saw the unemployment rate fall and the weekly wages grew by 0.4% month-over-month, more than expected.

Later in the day, the UoM Consumer Sentiment survey came in well ahead of expectations at 69.4 vs. 62.0 expected. This

Gold outlook could be impacted by next week’s key events

In light of today’s stronger data, the market will be wondering whether they will hear any form of confirmation from the Fed that rate cuts could start at the end of Q1 or start of Q2 next year, after all. Perhaps, the upcoming CPI report on Tuesday could determine how hawkish or dovish the Fed will be on Wednesday. So, that’s where gold investors’ focus will be next week.

US CPI and FOMC meetings among macro highlights next week

The highlight of the upcoming week might be the release of the inflation report on Tuesday, potentially casting a shadow over the anticipated interest rate maintenance at the FOMC meeting the following day. If inflation doesn't show signs of easing promptly, it might postpone expectations for the Fed's initial rate reduction. A stagnant Consumer Price Index (CPI) and a decrease in core CPI in the previous month have heightened speculation about a cut in Q1, bolstering US stock indices while weakening the US dollar. The debate around whether the Fed will hint at cuts during the imminent meeting continues, but any early indications of deflation could trigger a significant market response, even if the Fed adopts a cautious stance the following day.

It will be the last Federal Reserve meeting for 2023 on Wednesday. The FOMC will unveil its staff projections, dot plots, the customary statement, and subsequently engage in a press conference led by Chairman Jerome Powell. Presently, Fed Fund futures suggest an almost 100% probability of the Fed maintaining current interest rates. A noteworthy recent development involves a shift in expectations for the Fed's initial rate cut, transitioning from May to March, although these expectations saw some adjustment following a robust jobs report and consumer sentiment data on Friday.

BOE, ECB and SNB meetings also among next week’s key highlights

On Thursday, it is anticipated that the three major central banks in Europe will maintain their current policies. The Bank of England (BOE) has signaled an extended period of keeping the current rate unchanged, and the European Central Bank (ECB) has recently halted its policy, with market expectations dismissing the possibility of another increase. Persistent weakness in economic data has led traders to expect an ECB rate cut next year, propelling the DAX to achieve new record highs. Similar to the Federal Reserve, a slightly dovish stance from the ECB may be necessary to justify the market's revaluation for potential cuts. However, if the ECB does not indicate such a move in the upcoming week, this could bolster the euro and exert downward pressure on the DAX, and potentially on gold.

Gold technical analysis: key levels to watch

At the time of writing, the metal was still holding above $2000, which is a key short-term support. It needs to hold here to maintain its recent bullish bias. Otherwise, we could see a deeper retracement, especially when you consider how it failed to hold the breakout earlier this week above the old record high of $2081. The next big support level below $2K is down at $1950 area, where we also have the 200-day average.

Source: TradingView.com

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R