Trade Of The Week: Gold Down, But Not Out As February Kicks Off

After tumbling 2.5% last Friday due to an unexpectedly strong US jobs report, gold prices have kicked off the new week on a steadier note.

The precious metal is attempting to nurse deep wounds inflicted by January’s blockbuster NFP report which aggressively fuelled expectations around more US rate hikes from the Federal Reserve. Last month, the US economy created a whooping 517k jobs – the most since July and easily beating market forecasts of 185k. Meanwhile, unemployment fell to its lowest level since 1969 at 3.4%. Given how the stunningly good report is likely to energize dollar bulls and empower Fed hawks, the path of least resistance for gold may point south in the short to medium term.

In our 2023, we highlighted how gold could be one of the biggest gainers this year thanks to expectations around the Fed switching to rate cuts later in 2023. The latest developments may have poured some cold water on these expectations. However, more key economic data may be needed before any meaningful conclusions are made. In the meantime, there is a possibility that the robust jobs data may set the tone by supporting gold bears this month.

Taking a brief look at the technicals, gold may be down but certainly not out yet as bulls remain in some control on the monthly timeframe. There seems to be strong resistance around $1950 - $2000 while support can be found at $1700 - $1680. Gold could find itself rangebound until a fresh directional catalyst is brought into the picture.

Calm week before another storm?

Compared to last week’s mighty market thrills, key central bank meetings, and high-risk events, the economic calendar for this week is relatively light.

Naturally, much attention will be directed toward speeches from Fed officials including Jerome Powell and US President Joe Bidens State of the Union Address. Even the weekly initial jobless claims on Thursday and US February consumer sentiment published on Friday may influence gold prices. Overall, the direction of gold should mostly be dictated by renewed Fed hike bets, a stronger dollar, and rising Treasury yields.

Looking beyond this week, it’s all about the US inflation report published on 14th February. Back in December 2022, the annual inflation rate in the United States slowed for a sixth straight month to 6.5%. This was a welcome development for financial markets and raised hopes over the Fed shifting into lower gear on rates. However, the robust strength of the US labour could feed fears over inflation remaining stubbornly high despite the recent slowdown. Ultimately, further signs of cooling inflationary pressures in January could provide gold bulls some sort of lifeline as the battle for dominance rages on.

Other themes to watch out for…

It will be wise to keep a close eye on the developments revolving around Sino-U.S. relations. Market sentiment remains gripped by fears over worsening US-China relations after the US shot down a suspected Chinese spy balloon over the weekend. Should tensions escalate, this may promote risk aversion boosting appetite for safe-haven assets. While appetite towards gold could receive a boost, this may be capped by an appreciating dollar.

Gold to remain below $1900?

Despite edging higher on Monday, gold prices remain under pressure on the daily charts. After cutting through the $1900 psychological level like a hot knife through butter, bears are clearly in a position of power. Sustained weakness below $1880 may open the doors towards $1825 and $1800, respectively. If prices can push back above $1900, gold could challenge $1950 and $2000, respectively.

Looking at the monthly charts, the recent rejection from the $1950 could guide prices back toward $1700 before bulls re-enter the scene. A breakdown below $1700 has the potential to trigger a selloff towards $1625.

Gold inflation Federal Reserve negative interest rates rate hikes SMA MACD USD Treasury yields