Gold probing 6-week highs after big ADP employment miss

While the ADP report can be a volatile leading indicator for NFP on a month-by-month basis, it’s undeniably concerning that it has shown declining employment growth and negative revisions for three consecutive months now.

Gold 1

Despite the uptick in COVID cases across the US, traders have remained generally optimistic about the near-term prospects for the world’s largest economy as ongoing stimulus, continued reopening, and easy comparisons to last year’s economic environment (so-called “base effects”) combine to propel the ongoing recovery.

Based on this morning’s data though, that optimistic outlook suffered a setback. The ADP employment report, one of the better leading indicators for Friday’s marquee Non-Farm Payroll (NFP) report, missed expectations badly. Instead of the US economy creating 695k net new jobs in July as traders and economists were expecting, the actual figure came out at less than half of that at 330k; adding insult to injury, the June reading was also revised down a tick to 680k net new jobs.

While the ADP report can be a volatile leading indicator for NFP on a month-by-month basis, it’s undeniably concerning that it has shown declining employment growth and negative revisions for three consecutive months now. Traders are clearly spooked by the soft employment reading this morning, with major indices opening in negative territory, oil prices falling more than -2%, and the yield on the benchmark 10-year treasury bond testing 6-month lows at 1.13%.

Technical view: Gold

One of the only winners from this morning’s disappointing data has been gold. If the economic recovery in the US and globally continues to show signs of slowing, the yellow metal should theoretically benefit from ongoing fiscal and monetary stimulus along with falling real bond yields. As the daily chart below shows, gold is testing its highest level in six weeks near $1830, with a break above that level potentially opening the door for a continuation into the upper-$1800s or even toward the May peak above $1900:

Source: Tradingview, StoneX

Bullish readers may want to consider buying a confirmed breakout (ideally combined with a simultaneous breakout in the 14-day RSI indicator) above resistance at $1833, with a target up near $1900 and a stop below this week’s swing low near $1805. Meanwhile, a run of strong US data and rising bond yields could provide a potential headwind for gold prices, with the near-term bias shifting back to neutral if the yellow metal drops below $1800.

For more on the key levels to watch for gold, see my colleague Fiona Cincotta’s “Two trades to watch” article from this morning!

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