The first trading week of May is about to end, which means all of the attention will be on the US non-farm payrolls data. Well, that would have been the case had it not been for the small matter of the French elections at the weekend and also this week's collapse in commodity prices. Gold, silver, copper and iron ore, as well as crude oil prices, have all fallen sharply on a combination of worries about Chinese demand and in most cases excessive supply. But the commodities have all bounced back this morning, with crude oil most noticeably as it has recovered from a decline of around 3% overnight to turn flat at the time of this writing. Whether or not this is merely an oversold bounce for crude oil and the metals remains to be seen, as undoubtedly some of the bearish market participants are happy to bank healthy profits ahead of the US jobs report and the French elections on Sunday. In the event the collapse in commodity prices, the outcome of the French elections or some other stimulus triggers a “risk-off” response in the markets, safe-haven precious metals and gold in particular may make a strong comeback. Stocks could fall, for example, due to their seasonal tendencies as they don’t tend to perform well during the summer months. This could well be the case in the US where the indices have been rising dubiously fast in recent times, despite over-stretched valuations.
Dollar’s mixed performance: will it make a more decisive comeback?
Despite the falls in buck-denominated gold, silver and copper prices, the US dollar hasn't exactly been strong with the GBP/USD and EUR/USD remaining bid throughout the week. But the dollar has performed much better elsewhere. Up until Thursday, for example, the USD/JPY was rising noticeably while commodity currency pairs such as the AUD/USD and CAD/USD have been falling sharply as metal and oil prices tanked. So, key question is this: will the EUR/USD and GBP/USD also head lower soon? Given that most people strongly expect the market- and EU-friendly presidential candidate Macron to win the election in France on Sunday, the ‘good’ news may already be priced in for the euro. Still, a Macron victory may gave it a further – but probably short-lived – boost, before the single currency potentially falls back. The British pound’s rally also looks suspicious given the fact that the UK economy will be facing months of uncertainty due, above all, to the upcoming elections and on-going talks over a Brexit deal.
NFP in focus: leading indicators have been mixed
So, the dollar may make a more decisive comeback soon. But will the move happen as early as today? Well, we may get an answer if the jobs report shows a big surprise. Headline jobs growth is expected to have rebounded strongly to 194,000 after rising only 98,000 the month before. We are also watching out for any revisions to the previous months’ estimates. The other key component of the report will be average hourly earnings. This is seen rising 0.3% on the month, after climbing 0.2% the month before. In the event of a strong jobs report, the initial reaction of the dollar will likely be a bounce which may mean a fall for buck-denominated gold.
But given the increased expectations about a June rate rise from the Federal Reserve, the monthly jobs reports for April and also May are going to be very important. In March, US employment had increased much lower than expected as mentioned above while other macroeconomic pointers had been mostly disappointing, too. But at its latest meeting, the Fed said the slowdown in economy activity in the March quarter had been transitory and that employment was around normal levels while inflation was nearing the target. If the Fed is correct, employment growth should have bounced strongly in April.
However, leading indicators for non-farm payrolls have been mixed, making this one rather difficult to predict (was it ever easy?). After all, the employment component of the ISM manufacturing sector PMI had fallen sharply in April while the dominant non-manufacturing sector also witnessed a marginal drop in employment, according to its PMI. What's more, the ADP private sector payrolls report showed a sharp fall in April employment, although this was as expected after it had massively overestimated jobs growth the month before. But it wasn't all doom and gloom last month. Continuing jobless claims, for example, fell below 2 million as the 4-week average of claims held near 40-year lows. The fall in unemployment benefits was supported by a massive 43% drop in layoffs, as the Challenger report showed.
Dollar-gold correlation has weakened
But with the Dollar Index being near its lowest levels for the year, and gold also falling, the strong negative correlation between the metal and the greenback seems to have broken down for now. So, beyond a short-term movement it is difficult to predict the likely direction of gold prices in terms of the direction of the dollar as a result of the NFP. Thus, a potential recovery in US dollar may not necessarily translate into weaker gold and silver prices, as they could react to other factors, including, but not limited to, a risk-off event in the stock markets.
Gold’s technical outlook: bearish
Finally, we will turn our attention to the chart of gold. As can be seen, the long-term bearish trend line held again in mid-April, which resulted in another sell-off in gold. Subsequently, the short-term bullish trend line, moving averages and several support levels have broken down, including $1263, $1253 and $1247. These levels may turn into resistance in the event of a short-term bounce. In fact the area between $1247 and $1253 marks a key resistance zone now, for the 50- and 200-day moving averages also converge there. Thus in the short-term, the path of least resistance is to the downside and will remain that way for as long as this area holds as a ceiling. Therefore a small bounce, say as a result of a weaker NFP report, may not necessarily mean the downtrend is over – unless it causes a break in market structure of lower lows and lower highs. Even so, the long-term trend will be technically bearish for as long as that key trend line that has been in place since the year 2011 remains in place.
But for now, the 38.2% Fibonacci retracement level against the December low has held as support, around the $1229/$1230 area. If this turns out to be the low in the current cycle, then it would represent a relatively shallow pullback which would be very bullish. Thus a potential break out above the long-term bear trend would likely trigger a massive rally. But that is a potential scenario for now, which may never come to fruition. Indeed, at the moment, it appears more likely that gold will stage a deeper retracement in its current bearish cycle. Some of the supports below the 38.2% Fibonacci level that we are watching are at $1209, the 50% retracement level, followed by the previous support and resistance at $1200 and finally $1188/9, which marks the 61.8% Fibonacci level.