Gold Supported by Dismal NFPs- $1270 in Focus Ahead of CPI
Fundamental Forecast for Gold: Bullish
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Gold prices were modestly firmer this week with the precious metal rallying 0.67% to trade at $1244 ahead of the New York close on Friday. The advance comes on the back of concerns over a surprise slow-down in the US labor markets after NFPs posted their weakest monthly print since January 2011.
Expectations for a strong NFP report had been building all week after ISM employment figures last week and a robust APD private sector print this week topped consensus estimates. A print of just 74K was well off expectations for a read of 196K+ and although the unemployment rate dropped to 6.7% from 7%, the move was largely a result of another massive contraction in the civilian labor force. The loss of so called ‘discouraged workers’ has continued to put artificial downside pressure on the headline unemployment figure with the labor force participation rate falling back to 62.8%, its lowest read since December (which was the lowest read since 1978).
It’s important to note that upward revisions to last month’s blowout read may have helped temper the impact of today’s miss and whether or not weather played a role, one thing is certain- if the data continues to soften, the FOMC will likely find it increasingly difficult to warrant further tapering and Bernanke has already noted that the committee remains poised to decrease the pace, or even the taper all together. This now puts added emphasis on next week’s economic docket with retail sales, housing starts, and industrial production data on tap.
Highlighting the calendar next week will be the release of the December CPI figures on Thursday where market participant are calling for price growth to rise from a flat read to 0.3% m/m with year on year data seen rising from 1.2% to 1.5%. Should the inflation picture come in softer than expected, look for gold to remain well supported as traders begin to discount a slower-paced taper from the central bank and on the back of today’s employment report, a weaker print on the second of its dual mandates is likely to fuel speculation that the Fed may even halt the taper all together and bunt it to Janet Yellen who will be taking over as the Federal Reserve Chairman at the end of the month.
So what does all this mean for gold? Objectively speaking, the ‘taper’ is broadly bearish for gold and although our immediate forecast does look higher, the longer-term outlook remains weighted to the downside. Taper plays have likely been washed out at this point and threats to the timeline or pace of the cutbacks are likely to remain central focus in the near-term. Look for data to steer broader market sentiment with the price action in the USDOLLAR likely to offer further conviction on a medium-term bias. The index failed yet another attempt at the 10,712 barrier on Friday with a break below near-term support at 10,640/48 risking further losses for the greenback: a plus for gold.
From a technical standpoint, gold looks poised for a move higher with a breach above $1248 targeting key resistance at $1268/70. This region represents are more critical barrier and is defined by a three-way Fibonacci confluence & the December high. A compromise of this threshold constitutes a breakout of a larger structure dating back to the October high threatens our broader directional bias heading into 2014. Such a scenario looks for initial resistance targets at $1293 and $1325. A break below the monthly opening range low puts the broader trend back into focus with support targets eyed at $1151/60, $1125 and $1091. It’s important to note that we’ve put in a pretty clean monthly opening range, closing the week just below near-term resistance. Look for a break of this range offer further conviction on our corrective focus higher. - MB
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