Gold pressure increases as stellar jobs report reinforces March rate hike

  • Gold further extended its recent breakdown on Wednesday after the ADP private employment release reported a stellar 298,000 US private-sector jobs added in February, the highest increase since April 2014 and far higher than the ~185,000 expected.
  • While the ADP report is not necessarily a very accurate predictor of the US Labor Department’s official non-farm payrolls (NFP) data to be released on Friday, it is certainly an indication of significant improvement in the overall employment picture during the Trump Administration’s first full month in office.
  • Regardless of whether or not Friday’s NFP mirrors the ADP report in substantially surpassing expectations, the barriers to a Fed rate hike next week with respect to jobs have already been set rather low. The consensus expectations for Friday’s official data is also around 185,000. However, it has been widely surmised from recent hawkish comments by various Fed officials that even a number falling well short of expectations would be sufficient to constitute steady employment growth and warrant a Fed rate hike next week.
  • In view of this low hurdle for jobs data along with the highly encouraging ADP report on Wednesday, the likelihood of a March rate hike has risen to a near-inevitability – at least as far as the markets are concerned. As of Wednesday, the Fed Fund futures market is pricing-in a lofty 86% probability that the Fed will hike next week. Furthermore, anticipation of a possibly accelerated pace of rate hikes this year has also increased.
  • With such high confidence of rising interest rates going forward, as well as potentially strong corresponding support for the US dollar, pressure on non-yielding, dollar-denominated gold has been understandable. Further exacerbating this pressure on gold has been a recent market environment characterized by strong risk appetite and relative complacency, decreasing demand for the perceived safety of gold.
  • This combination of factors has led to a sharp slide for gold prices since late February. This slide led to a clear breakdown below a key uptrend support line in early March that has continued to follow through this week. Pressure on gold is likely to continue building in the short-term if Friday’s jobs data is near or above expectations and if the Fed raises rates next week as expected. This downside pressure could increase even further if the Fed begins to signal a faster pace of rate hikes in 2017 than previously expected.
  • Currently, the price of gold has begun to approach a key downside target at the $1200 psychological support level. Any further breakdown amid the official jobs data on Friday and the Fed meeting next week could open the way for an extended fall in gold prices, with key short-term downside targets around the $1185 and $1150 support levels.

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