Advertisement
Advertisement

Last Chance for Gold and the USD

By:
Adetola Freeman
Updated: Oct 24, 2022, 14:05 UTC

Tomorrow the United States will publish a NFP report on the labor market that could have a very important impact on gold and the US dollar.

Gold FX Empire

In this article:

The release of the US non-farm employment change (NFP) means a lot to the US stock market, especially in current conditions.

Earlier, the reading started to lose its effect because the Federal Reserve focused more on inflation than on the labor market. Things are changing now, and tomorrow may be pivotal for the USD and gold.

Why is NFP Important Again?

The reason traders choose to both acknowledge and scrutinize this data is that it provides a footing for identifying potential rates of inflation and the rate of economic growth. Fed stated in August and September that further rate decisions would rely only on economic data and not on sole Fed’s plans to imply tightening or easing policies.

For example, in August 2021, higher-than-expected NFP crashed gold by 14 000 points. It was one of the most significant plunges over the past few years. Markets were watching the NFP because it affected the monetary tightening process and Fed’s rhetoric.

undefined

However, in March 2022, after the rate hikes began, the NFP release didn’t change anything. Despite exceeding expectations by 200K, markets lost interest in it due to the new Fed’s focus: inflation. You can see the result of the March NFP in the figure below: USD fell and gold went up.

undefined

Currently, we see that NFP releases are becoming more attractive to the market as the Fed will choose its future monetary actions depending on economic data. The August 5 release exceeded expectations twice and pushed gold down by 2200 points. Will this time be the same?

Economy Outlook Ahead of NFP Release

For the last 2.5 years, the number of jobs created in the US has been decreasing. This downtrend has fundamental reasons. First, Covid-19 started the quantitative easing process, which resulted in $8 trillion of excess monetary supply. Second, the economy began to slow down because of constant supply concerns and the accelerating deglobalization process. The Russian invasion of Ukraine is the main driver of the latter. However, signs of upcoming division became visible earlier due to the US-China economic clash of the last years.

The figure below shows that since July 2020, the US labor market has had a clear downtrend in payrolls that is likely to continue. Every day there’re fewer options to provide workplaces due to the slowdown affecting the US.

US NFP monthly data. Source: tradingeconomics.com

Potential Effect on Markets

NFP consensus for October is at 265K new payrolls. According to the NFP dynamics over the last years and taking into account the strong labor market (as Fed’s chair Jerome Powell says), our forecast for the release is between 250K and 300K. Everything above the level of 250K can be considered a signal that the market has a margin of safety. Thus, Fed may add more tightening if the inflation data is bad.

Therefore, gold may plunge to make a retest of the trendline or to touch the yellow zone we consider pivotal. It may be a fast fake movement to collect Stop Losses, and we suggest that the uptrend in the metal may continue after it.

XAU/USD H4 chart

Resistance: 1730, 1800

Support: 1680, 1655, 1615

undefined

About the Author

Adetola Freemancontributor

Adetola Freeman is a Financial Markets Specialist and Trainer with over 12 years of professional experience. He is an industry-leading Forex and Crypto trading Expert with a track record of consistency. He has been the Lead Instructor at EzFx Academy and trained hundreds of profitable students across Africa, Europe, and Asia.

Did you find this article useful?

Advertisement