Gold (XAU/USD) jumps more than 3.50% on Wednesday as weaker-than-expected US labour market data pressures the US Dollar (USD), while lower Oil prices on hopes of reopening the Strait of Hormuz ease inflation concerns and weaken expectations for Federal Reserve (Fed) rate hikes.
At the time of writing, XAU/USD trades around $4,230, its highest level since June 18. The US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, trades around 99.70.
ADP Employment Change rose by 44K in July, missing expectations of 70K and slowing from 98K in June. The report follows Tuesday’s softer-than-expected JOLTS Job Openings data. Traders now look ahead to Friday’s Nonfarm Payrolls (NFP) report for further clues about the US labour market.
Meanwhile, the ISM Services Purchasing Managers Index (PMI) edged up to 54.1 in July from 54 in June but fell short of the 54.5 market forecast.
Strategists at ING note that “lower energy prices have eased some inflation concerns, offering a more supportive backdrop for bullion,” even as investors continue to weigh the policy outlook. They point out that “markets continue to assess the outlook for US monetary policy following last week’s Federal Reserve meeting,” leaving Gold “caught between improving geopolitical sentiment and ongoing uncertainty over US interest rates.”
Expectations of a September Fed rate hike have weakened, with the CME FedWatch Tool showing the probability falling to 56.9% from 67.2% a day earlier.
Despite fading rate-hike bets, the US central bank is expected to maintain a restrictive policy stance until inflation is clearly moving back toward its 2% target. This suggests that interest rates could stay higher for longer, which may prevent Gold from staging a stronger recovery.
On the geopolitical front, US President Donald Trump said Washington had “very good discussions” with Iran during day-long negotiations on Tuesday. Trump added that the Strait “is going to be open very soon.”
Axios reported that the United States, Iran and Oman are nearing an interim deal that could be announced as early as Wednesday. The proposed deal would establish a temporary 60-day arrangement between Iran and Oman to restore shipping.
Technical analysis: XAU/USD turns bullish above the 21-day and 50-day SMAs
On the daily chart, XAU/USD has reclaimed the 21-day and 50-day Simple Moving Averages (SMAs) at $4,064 and $4,160, respectively, while breaking above the $4,200 mark, strengthening the near-term bullish bias.
Momentum is improving, with the Relative Strength Index (RSI) around 59 and the Moving Average Convergence Divergence (MACD) in positive territory, suggesting buyers are attempting to regain control while still facing near-term trend resistance.
On the upside, a daily close above $4,200 would open the door toward the 100-day SMA near $4,398. On the downside, the 50-day SMA at $4,160 offers initial support, followed by the 21-day SMA at $4,064 and the psychological $4,000 mark. A break below $4,000 would signal a deeper correction.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
Nonfarm Payrolls FAQs
Nonfarm Payrolls (NFP) are part of the US Bureau of Labor Statistics monthly jobs report. The Nonfarm Payrolls component specifically measures the change in the number of people employed in the US during the previous month, excluding the farming industry.
The Nonfarm Payrolls figure can influence the decisions of the Federal Reserve by providing a measure of how successfully the Fed is meeting its mandate of fostering full employment and 2% inflation.
A relatively high NFP figure means more people are in employment, earning more money and therefore probably spending more. A relatively low Nonfarm Payrolls’ result, on the either hand, could mean people are struggling to find work.
The Fed will typically raise interest rates to combat high inflation triggered by low unemployment, and lower them to stimulate a stagnant labor market.
Nonfarm Payrolls generally have a positive correlation with the US Dollar. This means when payrolls’ figures come out higher-than-expected the USD tends to rally and vice versa when they are lower.
NFPs influence the US Dollar by virtue of their impact on inflation, monetary policy expectations and interest rates. A higher NFP usually means the Federal Reserve will be more tight in its monetary policy, supporting the USD.
Nonfarm Payrolls are generally negatively-correlated with the price of Gold. This means a higher-than-expected payrolls’ figure will have a depressing effect on the Gold price and vice versa.
Higher NFP generally has a positive effect on the value of the USD, and like most major commodities Gold is priced in US Dollars. If the USD gains in value, therefore, it requires less Dollars to buy an ounce of Gold.
Also, higher interest rates (typically helped higher NFPs) also lessen the attractiveness of Gold as an investment compared to staying in cash, where the money will at least earn interest.
Nonfarm Payrolls is only one component within a bigger jobs report and it can be overshadowed by the other components.
At times, when NFP come out higher-than-forecast, but the Average Weekly Earnings is lower than expected, the market has ignored the potentially inflationary effect of the headline result and interpreted the fall in earnings as deflationary.
The Participation Rate and the Average Weekly Hours components can also influence the market reaction, but only in seldom events like the “Great Resignation” or the Global Financial Crisis.
