Gold price plunges as upbeat US NFP report casts doubts over Fed rate-cut hopes for May
|- Gold price has been hit hard after the release of solid US NFP data
- The US Dollar delivers V-shape recovery as upbeat US NFP data fade Fed rate cut hopes.
- Fed officials may continue supporting restrictive monetary policy for longer.
Gold price (XAU/USD) falls vertically as the United States Bureau of Labor Statistics (BLS) has reported robust Nonfarm Payrolls (NFP) data for January. US employers hired 353K new workers against the consensus of 180K and 216K fresh payrolls added in December. The Unemployment Rate remains unchanged at 3.7%, while investors anticipated a slight increase to 3.8%. The inflation outlook has turned extremely stubborn as Average Hourly Earnings grew at a robust pace than what market participants have estimated.
Monthly Average Hourly Earnings were up by 0.6% against 0.4% growth in December. Investors projected a decline in growth by 0.3%. The annual wage growth was higher at 4.5% against expectations of 4.1% and the former reading of 4.4%.
The upbeat labor market data is expected to allow Federal Reserve (Fed) policymakers to lean towards keeping interest rates higher for longer. In the monetary policy statement, Fed Chair Jerome Powell said clearly that policymakers need greater confidence about inflation returning sustainably to the 2% target.
Daily digest market movers: Gold price comes under trouble on robust US wage growth
- Gold price faces an intense sell-off while the US Dollar has rebounded strongly after the release of the upbeat United States official Employment data for January.
- The NFP report shows that labor demand was robust, and employers have offered a higher wage growth to workers than market expectations.
- An upbeat wage growth data would accelerate fears of sticky price pressures, which could further dampen hopes of rate cuts by the Federal Reserve in March.
- As per the CME Group Fedwatch tool, traders see a 57% chance for a 25 bps rate cut in May to 5.00%-5.25%, which is down after the release of the Employment data.
- Expectations for the first rate cut by the Fed after a two-year-long rate-tightening campaign were shifted to May from March earlier.
- In his last press conference, Fed Chair Jerome Powell said a dovish decision in the March meeting is unlikely as the central bank won’t get confident about inflation declining to the 2% target by then.
- Economic indicators such as robust consumer spending, a lower jobless rate, and a recovery in factory data have cast doubts among Fed policymakers about price stability.
- The US ISM reported on Thursday that the Manufacturing PMI for January rose sharply to 49.1 against expectations of 47.0 and the former reading of 47.1. Still, the PMI remained below the 50.0 threshold. The New Orders Index rose significantly to 52.5 vs. 47.0 in December. A robust factory order book indicates an improvement in demand.
Technical Analysis: Gold price dives to near $2,030
Gold price drops vertically from $2,050 after the release of the upbeat US NFP data. The precious metal fails to continue its four-day winning streak. The near-term appeal for the yellow metal has turned cautious despite delivering a breakout of the Symmetrical Triangle chart pattern formed on a daily timeframe.
The Gold price struggles to sustain above the 20-day Exponential Moving Average (EMA), which hovers near $2,035. The 14-period Relative Strength Index (RSI) faces pressure near the 60.00 hurdle.
Nonfarm Payrolls FAQs
What are Nonfarm Payrolls?
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.
How does Nonfarm Payrolls influence the Federal Reserve monetary policy decisions?
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.
How does Nonfarm Payrolls affect the US Dollar?
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.
How does Nonfarm Payrolls affect Gold?
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.
Sometimes Nonfarm Payrolls trigger an opposite reaction than what the market expects. Why is that?
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.
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