Gold Prices Find Solace Post-NFPs, CPI to Drive Next Week

Fundamental Forecast for Gold:Neutral

Gold prices fell for the fourth consecutive week with the precious metal down nearly 0.5% to trade at 1271 ahead of the New York close on Friday. The losses come amid what seems to be an unstoppably rally in broader risk assets with the major U.S. equity indices up more than 1% on the week. Demand for gold has been soft with prices down nearly 7% off the September (yearly) highs before an NFP inspired late-week rally offered a brief reprieve to the recent downward pressure.

A surprise U.S. Non-Farm Payroll report on Friday showed the economy shedding some 33K jobs last month, missing expectations for a gain of 80K. However, a closer look at the data reveals underlying strength in the labor markets with labor force participation rising to its highest level since March of 2014 at 63.1%. Wage growth figures were also stronger-than-expected with average hourly earnings posting a 2.9% y/y gain – up from a previous upwardly revised 2.7% y/y. With the recent barrage of hurricanes largely accounting for the weak headline figure, the broader labor market outlook remains firm and keeps the FOMC on target for a December rate hike. Fed fund futures are now pricing in a 90% probability for a 25bps hike before the end of the year.

Inflation data will be central focus next week with the U.S. Consumer Price Index slated for Friday. Consensus estimates are calling an uptick in the core rate of inflation to 1.8% y/y. September retail sales & the University of Michigan confidence surveys are also on tap with both expected to post stronger monthly figures. For gold prices, the outlook remains precarious and while we may yet see some further weakness, the broader technical view calls for a near-term low early in October trade.

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Gold Prices Find Solace Post-NFPs, CPI to Drive Next Week
  • A summary of IG Client Sentimentshows traders are net-long Gold - the ratio stands at +3.75 (79% of traders are long)- bearish reading
  • Long positions are 5.3% lower than yesterday but 6.8% higher from last week
  • Short positions are 0.5% lower than yesterday and 18.9% lower from last week
  • We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests Spot Gold prices may continue to fall. However, retail is less net-long than yesterday but more net-long from last week and the combination of current positioning and recent changes gives us a further mixed Spot Gold trading bias from a sentiment standpoint.

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Gold Daily

Gold Prices Find Solace Post-NFPs, CPI to Drive Next Week

Last week we highlighted that a break below support had kept the focus lower in gold with targets, “eyed at 1281 backed by more a more significant confluence at 1263/68.” Price registered a low at 1261 before reversing higher on Friday. As we noted in our quarterly forecast, the broader focus remains weighted to the topside for gold while above 1240 (bullish invalidation). A weekly close above 1295 would be needed to shift the near-term focus back to towards 1325.

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Gold 240min

Gold Prices Find Solace Post-NFPs, CPI to Drive Next Week

Gold Prices Find Solace Post-NFPs, CPI to Drive Next Week

A closer look at price action highlights gold prices continuing to trade within the confines of this well-defined descending channel formation extending off the September high. Note the response at the 61.8% retracement on Friday at 1263- an outside reversal candle suggests the near-term risk is higher heading into the open with initial resistance eyed at 1281. A breach through the 1298 would be needed to suggest a more significant low is in place.

Bottom line: the monthly / quarterly opening-range is just starting to take shape and from a trading standpoint, I’d be looking to fade a move lower towards key structural support OR buy a pullback after a breach above 1281.

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---Written by Michael Boutros, Currency Strategist with DailyFX

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