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Gold undermined by “risk-on” rally ahead of NFP

Gold has struggled so far this week after enjoying a two-week winning streak in May. Up until now, the buck-denominated metal has been supported above all by a soft US dollar. But with the greenback showing signs of life after Thursday’s release of strong ADP employment figures, expectations about a June rate hike have risen closer to 100 per cent again.  Those expectations would be further cemented if we have a strong nonfarm payrolls report today. As a result, the dollar may rally which could undermine the precious metal.

The perceived safe haven asset is also coming under pressure from on-going “risk-on” rally. This morning saw the FTSE 100 index hit a new record high, as the S&P 500 index future moved into a fresh unchartered territory. Japan’s Nikkei index reclaimed the 20,000 hurdle overnight. Equities remain supported, for the time being, by global interest rates being near historically low levels. The likes of the ECB, BoE and BoJ continue to maintain their asset purchases programmes. Recent improvements in economic conditions are yet to translate into overcooking inflationary pressures. Some believe that this so-called “goldilocks” growth phase would allow global central banks to maintain interest rates low for a while yet. But if global inflationary pressures start to rise more rapidly then interest rates could rise sharply, and undermine the appetite for equities. So, although rising interest rates are seen as negative for noninterest-bearing precious metals, the latter could actually find support from safe haven flows if tighter monetary conditions cause equities to slump. Thus until and unless we see a marked deterioration in appetite for risk, there is a risk we may see a sharp drop in gold prices.

Unless it somehow manages to break through its long-term bearish trend line and massive resistance around the $1274-80 area, gold’s technical outlook will remain bearish. If short-term support around $1260 gives way, say as a result of strong US jobs data today, then we could see a sharp drop that could last several days or weeks even.

Source: eSignal and FOREX.com

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