Gold rebounds, but Fed expectations continue to weigh

Despite last week’s sharp disappointment in the headline US non-farm payrolls release, which showed a hurricane-related loss of 33K jobs in September against forecasts for around an 80-90K gain, market expectations for a December interest rate hike from the Federal Reserve actually rose above 90% in the aftermath of the release. Part of the reason for this rise in Fed expectations despite the headline jobs disappointment was that markets had already discounted September’s anomalous weather impact. Also, a key inflation indicator found in the jobs report – wage growth – surprised significantly to the upside, further supporting a likely December rate hike.

Due to this rise in Fed expectations, the US dollar extended its recent recovery and gold continued to fall in the immediate aftermath of Friday’s employment release. While these market moves soon reversed, however, the dollar remains supported and gold remains pressured on both the prospect of a near-term rate hike in December as well as the possibility that a more hawkish Federal Reserve Chair will be nominated by the Trump Administration and appointed after current Chair Janet Yellen’s term expires in February.

The new trading week has seen the price of gold rebound, erasing losses from the previous week, after dropping to nearly a two-month low around $1260 directly following Friday’s US jobs report. This rebound occurred at a key confluence of technical support factors, including the 200-day moving average as well as the 61.8% Fibonacci retracement of the prior rally.

Major geopolitical risk concerns, including the ongoing tensions between North Korea and the US, are highly likely to result in gold surges driven by safe-haven demand. However, if Fed expectations remain elevated and the US dollar continues to be supported as a result, the overall directional bias for the precious metal should remain to the downside. Such pressure on gold has the potential to extend its current one-month slide. With any subsequent breakdown below the noted support around $1260, the next major downside targets are at the key $1250 and $1200 support levels.

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