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Gold Prices Extend Higher as Traders Mull Inflation Against Strong NFP

Gold Prices Extend Higher as Traders Mull Inflation Against Strong NFP

Margaret Yang, CFA, Strategist

GOLD PRICE OUTLOOK:

  • Gold prices climbed 0.2% on Monday to $1,810 following a strong US nonfarm payrolls print
  • Rising wage pressures may buoy gold as it is widely perceived as a good inflation hedge
  • Prices are eyeing $1,810 for immediate resistance, breaching which may open the door for further gains

Gold traded modestly higher during Monday’s APAC mid-day trading session following a much stronger-than-expected US nonfarm payrolls report. The Labor Department showed that 467k jobs were added in January, smashing market expectation of a 150k increase. There were also substantial upward revisions to the prior two months. Much higher-than-expected job gains underscore strong labor market conditions against the backdrop of surging Omicron cases. This also suggests that the economy is weathering the pandemic’s impact well, and may be strong enough to withstand a few interest rate hikes this year.

As a result, the implied probability of a 50bps rate hike during the March FOMC meeting has risen to 36.6% after the release of the jobs data, according to CME’s FedWatch tool. Market participants are anticipating 5-6 quarter point rate hikes this year, according to Bloomberg. A faster pace of interest rate hikes casts a shadow over the outlook for gold, which is a non-yielding asset.

Implied Probability of Interest Rate Hikes During March FOMC Meeting

Gold Prices Extend Higher as Traders Mull Inflation Against Strong NFP

Source: CME Group

On the other hand, gold prices are buoyed by strong wage growth (0.7% MoM) and rising crude oil prices, both of which feed into inflationary pressures. The yellow metal has long been perceived as a store of value and hedge against inflation, therefore those factors appeal to be lending support to its prices. WTI crude oil prices surged to $92.5 per barrel, the highest level seen in more than 7 years due to pent-up demand and supply constraints. This points to rising base material and energy prices in the near future, and this trend shows no sign of ebbing soon.

Looking ahead, this Thursday’s US core CPI readings will be in the spotlight as traders look for clues about January’s inflation print and its ramifications for the Fed’s rate hike path.

Technically, gold prices rebounded from the trendline support as highlighted on the chart below. Prices are testing an immediate resistance level at $1,810, breaching which may open the door for further upside potential with an eye on $1,834. The MACD indicator is hovering near the neutral midpoint, suggesting that prices are hesitant about where to go next.

Gold - Daily Chart

Gold Prices Extend Higher as Traders Mull Inflation Against Strong NFP

Chart created with TradingView

--- Written by Margaret Yang, Strategist for DailyFX.com

To contact Margaret, use the Comments section below or @margaretyjy on Twitter

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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