Gold finds relief as dollar rally pauses – for now

With the lack of any major data, the first half of Thursday’s session was always going to be uninspiring and so it proved. The dollar pulled back; gold bounced back a tad, and indices went down. In the second of today’s session, there isn’t an awful lot either to cause any major data-driven moves. That said, we did just have the weekly US jobless claims number, which came in weaker than expected.

• U.S INITIAL JOBLESS CLAIMS ACTUAL: 211K VS 190K PREVIOUS; EST 195K
• U.S CONTINUING JOBLESS CLAIMS ACTUAL: 1718K VS 1655K PREVIOUS; EST 1660K

This goes against the recent trend of a strong US labour market, as people applied for more unemployment-related benefits than expected.  But this weekly data is quite volatile, and the Fed looks at the trend of the data than individual figures on their own.

Fed looks at trend of data

Indeed, just a day earlier we saw firms advertised more job openings than expected, with JOLTS Job Openings climbing to 10.824 million vs 10.546 million eyed. On top of this we have had a strong ADP private sector payrolls report at 242K vs. 197K eye. Last week saw the employment component of the closely watched ISM services PMI come in much hotter at 54.0 compared to 50.0 the month before. The official non-farm payrolls reports have been beating expectations every month since last April. The January print was super-hot at over 500K when less than 200K was expected.

So, you get the picture – the US jobs market is strong, and this is a worry for the Fed looking to reign in on inflationary pressures.

All about NFP and CPI next

With today’s only US data release out of the way, it is all about Friday’s US jobs report and then CPI next week. If these macro pointers both come in hotter, or at least match expectations, then that could further raise bets over a 50-basis point rate increase at the Fed’s March 22 meeting.

The market has started to price in a more hawkish Fed after the Chairman Powell warned that the US central bank could ramp up the pace of rate hikes and could keep a tight policy in place for longer. This sent the odds of a 50-basis point rate hike for the March 22 meeting to above 70%. Those expectations could rise further in the event of an above-forecast readings for CPI and/or NFP. You would feel that CPI needs to be significantly lower than expectations to cause a big sell-off in US dollar.

Why has gold fallen this week?

In short, because of Jerome Powell’s testimony which was littered with many hawkish comments, sending US yields soaring higher, dragging the US dollar with it, and hurting buck-denominated assets like gold and silver. But when we consider that Fed Fund futures are now pricing in a 50bp hike and a higher terminal rate of 5.75%, gold is actually holding its own rather well around $1825.

That said, the path of least resistance is to the downside and the metal faces resistance from several sources, including the above macro factors and technical levels such as $1835.

Can gold make a surprise comeback?

For gold to make a stronger recovery, we will have to see a surprise miss on Friday’s NFP. If that happens, it could support stocks, gold and bonds as traders question the likelihood of such an aggressive hike. On a side note, the market may have gotten ahead of itself as Powell did not explicitly say that a 50bp is on the cards. So, there’s definitely room for disappointment if it ends up being a mere 25bp hike on March 22. This therefore makes the upcoming NFP and inflation data very important indeed.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R