Gold Faces Pressure Despite Weaker US Jobs Report
Gold (XAU/USD) decreased by 0.78% as the US dollar (USD) remained steady despite the US adding fewer jobs than expected last month.
The US economy created fewer jobs in August than anticipated, with substantial downward revisions to the June and July data. Despite this, the unemployment rate matched expectations by dropping towards 4.2%, and wage growth rose by 0.4%, surpassing the predicted 0.3%. However, New York Federal Reserve (Fed) President John Williams noted that it's now appropriate for the regulator to cut interest rates, pointing to progress in reducing inflation and signs of a slowing labour market.
Markets are now split on whether the Fed will opt for a 25-basis-point (bps) or a more significant 50-bps rate cut at its next meeting. Overall, analysts expect a total of 125 basis points in cuts over the remaining meetings this year. A softer monetary policy tends to support gold by lowering the opportunity cost of holding non-yielding bullion.
XAU/USD moved sideways during the Asian trading session. Today, no major macroeconomic events could trigger a strong move in the market. This week, the US Consumer Price Index (CPI) report will be released on Wednesday. The data will play a crucial role in shaping the Fed's upcoming interest rate decision.
"Spot gold may retest support at $2,486 per ounce, a break below which could open the way towards $2,472", said Reuters analyst Wang Tao.
Euro Weakens as Fed Rate Cut Expectations Moderate
The euro (EUR/USD) lost 0.23% against the US dollar (USD) during a very volatile trading session on Friday as the US nonfarm payroll (NFP) report lowered the chances for a 50-basis-point (bps) rate cut by the Federal Reserve (Fed).
EUR/USD has been in a strong uptrend since 2 August, but its rise has been mostly due to the weakness in the US Dollar Index (DXY) rather than the result of the underlying strength in the eurozone economy. Indeed, traders and investors have been highly optimistic about the Fed opting for a large 50-bps rate cut later this month, exerting downward pressure on the DXY. Most recently, however, traders have started to doubt the Fed's ability to deliver a sizeable cut, especially after the latest NFP report. The data showed that the unemployment rate remained steady while average earnings rose sharply.
Despite the recent adjustment in investors' interest rate expectations, the Fed is still expected to pursue a more dovish monetary policy than the European Central Bank (ECB). Still, most of that divergence is probably already priced in by the market. Therefore, EUR/USD may be at risk of an abrupt downward correction, especially if the US macro data continues to come out stronger than expected.
EUR/USD was falling during the Asian and early European trading sessions. The bearish short-term trend in the EUR/USD may continue as there are no notable events today. However, traders refrain from placing large bets ahead of the US Consumer Price Index (CPI) report on Wednesday and the European Central Bank (ECB) interest rate decision on Thursday.
British Pound Loses Ground as Fed Rate Cut Hopes Dented
The British pound (GBP/USD) lost 0.39% against the US dollar (USD) on Friday as the US nonfarm payroll (NFP) report was mostly better than expected, supporting the case for a gradual interest rate reduction by the Federal Reserve (Fed).
Although Friday's NFP report indicated that job creation was slowing down, it also revealed a substantial rise in average earnings and the unchanged unemployment rate.
"I think the market's really struggling with this one because it's really in the middle of what could be used as a justification for either a 25- or 50-basis-point rate cut", said Gennadiy Goldberg, head of US rates strategy at TD Securities.
Indeed, the initial market reaction to the report was rather mixed. GBP/USD first rallied sharply but then fell just as sharply and closed the day with losses. It seems the market eventually treated the data as ‘not so bad’, which doesn't warrant an aggressive rate cut. According to the CME FedWatch Tool, there is now only a 29% chance of a 50-basis-point rate (bps) cut by the Fed next week.
Meanwhile, the U.K. labor market continued to cool in August. The monthly Report on Jobs showed that permanent job placements dropped at the fastest pace in five months. Starting pay growth for permanent staff also fell to a five-month low, one of the weakest readings since early 2021. ‘The news that while salaries rose last month, it was at the weakest rate since March could help make the case for more rate cuts when the Monetary Policy Committee meets to decide the future path of interest rates’, said Jon Holt, KPMG's accounting firm chief executive. Currently, investors don't expect the Bank of England (BOE) to deliver a rate cut in September, but they price in three 25-bps reductions by March 2025.
GBP/USD rose slightly during the Asian session but started to fall again during the early European trading session. Today, there are no major data releases on the macroeconomic calendar, so the established short-term bearish trend in GBP/USD may continue. Later this week, GBP will likely be highly volatile as the Office of National Statistics will release several critical reports, including Claimant Count and Gross Domestic Product (GDP) Growth data. The jobs report will come out tomorrow at 6:00 a.m. UTC. Worse-than-expected figures may prolong the bearish trend and push GBP/USD towards 1.30350.