Gold eyes more downside ahead of US NFP report

Gold price strives for a direction despite easing labor market conditions.
The US economy could lose its resilience if the Nonfarm Payrolls report misses expectations.
The latest US Services PMI Orders dropped significantly, portraying a deteriorating demand outlook.

Gold price (XAU/USD) has traded sideways since Tuesday as investors await the Nonfarm Payrolls (NFP) report, which will give a snapshot of the current status of the United States labor market. The precious metal failed to climb above the $1,830 ceiling on Wednesday despite soft ADP Employment Change and new Services PMI orders, as the Federal Reserve (Fed) is not expected to surrender its ‘higher-for-longer’ stance on interest rates.

The US Dollar (USD) has risen due to rising real rates amidst falling inflation, however, easing labor market conditions could dent its appeal. Meanwhile, the US Department of Labor has reported stable weekly jobless claims data for the week ending September 29. Individuals claiming jobless benefits for the first time increased marginally to 207K from the former reading of 205K but lower than expectations of 210K.

This week, Cleveland Fed Bank President Loretta Mester said that interest rates should rise again in November if the economy continues to remain the way it is. Evidence of weakening labor demand, however, could prove a spoiler leading to the Fed’s interest rates staying unchanged.

Daily Digest Market Movers: Gold price juggles ahead of US Employment data

Gold price falls back while attempting a break above the immediate resistance of $1,830.00 as the US Dollar rebounds after correcting to near 106.50. 10-year US Treasury yields improve to near 4.74%.
The precious metal failed to capitalize on soft US Institute of Supply Management (ISM) Services PMI and a weak ADP Employment Change report for September.
The US ADP reported that employers hired 89K fresh talent in September, almost half August’s reading of 180K and lower than expectations of 153K. This was the lowest labor growth since January 2021.
Nela Richardson, chief economist at ADP said "We are seeing a steepening decline in jobs this month"." Additionally, we are seeing a steady decline in wages in the past 12 months."
Loosening labor market conditions is expected to dent expectations for one more interest rate increase by the Federal Reserve in the remainder of 2023, which were propelled by hawkish interest rate guidance from Cleveland Fed Bank President Loretta Mester and Fed Governor Michelle Bowman.
The US Services PMI for September matched expectations at 53.6 but dropped from the 54.5 reading in August. Being a proxy for the US service sector, which accounts for two-thirds of the US economy, the economic data carries weight and importance.
New Services PMI Orders dropped significantly to 51.8 against the former release of 57.5, indicating a poor demand outlook.
On the US factory activity front, the Manufacturing PMI for September improved significantly. A revival in the US manufacturing sector is anticipated. New Factory Orders in August expanded by 1.2% vs. expectations of a 0.3% gain on a monthly basis. In July, orders for US-made goods contracted by 2.1%.
The US Dollar Index (DXY) faced selling pressure after weak US data on Wednesday but has revived gradually as investors appear to have placed less significance on the September ADP Employment Change. The Fed is scheduled to announce its next monetary policy move in November. Policymakers are expected to give more preference to October’s private payrolls data.
Meanwhile, investors await the NFP report for September, which will provide more clarity about labor market conditions.
According to estimates, the US labor force is expected to have witnessed fresh additions of 170K employees – lower than the former release of 187K. The Unemployment Rate is seen declining to 3.7% vs. August’s reading of 3.8%.
In addition to the jobs data, investors will watch out for the Average Hourly Earnings data. On a monthly basis, labor earnings are forecast to have expanded at a higher pace of 0.3% against a 0.2% jump recorded in August. The annual data is seen unchanged at 4.3%. Higher wages could elevate consumer inflation expectations ahead.

Technical Analysis: Gold price consolidates around $1,820

Gold price remains inside the woods in a $1,820-1,830 range from late Tuesday as investors await the US NFP report. The precious metal struggles for a direction but the downside bias seems favored as the 50 and 200-day Exponential Moving Averages (EMAs) have delivered a bear cross. A seven-day losing spell has been recorded in the Gold price. Momentum oscillators trade in the oversold zone but more downside cannot be ruled out.

Employment FAQs

How do employment levels affect currencies?

Labor market conditions are a key element to assess the health of an economy and thus a key driver for currency valuation. High employment, or low unemployment, has positive implications for consumer spending and thus economic growth, boosting the value of the local currency. Moreover, a very tight labor market – a situation in which there is a shortage of workers to fill open positions – can also have implications on inflation levels and thus monetary policy as low labor supply and high demand leads to higher wages.

Why is wage growth important?

The pace at which salaries are growing in an economy is key for policymakers. High wage growth means that households have more money to spend, usually leading to price increases in consumer goods. In contrast to more volatile sources of inflation such as energy prices, wage growth is seen as a key component of underlying and persisting inflation as salary increases are unlikely to be undone. Central banks around the world pay close attention to wage growth data when deciding on monetary policy.

How much do central banks care about employment?

The weight that each central bank assigns to labor market conditions depends on its objectives. Some central banks explicitly have mandates related to the labor market beyond controlling inflation levels. The US Federal Reserve (Fed), for example, has the dual mandate of promoting maximum employment and stable prices. Meanwhile, the European Central Bank’s (ECB) sole mandate is to keep inflation under control. Still, and despite whatever mandates they have, labor market conditions are an important factor for policymakers given its significance as a gauge of the health of the economy and their direct relationship to inflation.

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