Gold (XAU/USD) dropped sharply on Friday following a stronger-than-expected US Nonfarm Payroll (NFP) report but then recovered and stabilized at $2,650.
Gold retreated further from its record highs after signs of a robust US labor market decreased the chances that the Federal Reserve (Fed) will continue to deliver aggressive rate cuts. Nonfarm payrolls rose by 254,000 in September, far surpassing the expected 140,000, while the unemployment rate unexpectedly dropped towards 4.1%. This data reduced worries about labor market softness seen in prior months, making investors believe the Fed will take a less aggressive approach to interest rate easing. Lower rates typically decrease the opportunity cost of holding non-yielding gold.
The positive US NFP report alleviated fears of an economic slowdown, coupled with optimism surrounding China's stimulus measures, which continue to bolster sentiment in the equity markets. The CME Group's FedWatch Tool indicates that traders now estimate a nearly 95% probability of the Fed implementing a 25-basis-point (bps) rate cut at the November meeting. Meanwhile, official data released Monday showed that China's gold reserves have remained steady at 72.8 million for the fifth consecutive month as of the end of September.
XAU/USD fell during the Asian trading hours. 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 Thursday. The data will play a crucial role in shaping the Fed's upcoming interest rate decision.
"Spot gold is biased to retest support at $2,633 per ounce, a break below which could open the way towards $2,611 to $2,619 range", said Reuters analyst Wang Tao.
Euro Breaks Out of Its 2-Month Range and Heads Lower
The euro (EUR/USD) lost 0.50% against the US dollar (USD) on Friday after a surprisingly strong jobs report for September led traders to expect fewer rate cuts by the Federal Reserve (Fed).
US Nonfarm Payroll (NFP) report showed a much higher-than-expected increase in the number of new jobs. The unemployment rate also unexpectedly slipped towards 4.1% from 4.2% in August. It is a ‘blockbuster payroll report by any measure. I think a no-landing scenario for the US economy has suddenly become far more plausible.
The expectation now would be for a Fed that treads far more cautiously in easing policy’, said Karl Schamotta, chief market strategist at Corpay in Toronto. A stronger-than-expected NFP report came after Fed Chair Jerome Powell had downplayed the expectations for large rate cuts.
The combination of improving economic data and Powell's less dovish rhetoric led traders to downsize their expectations of a 50-basis-point (bps) rate cut at the Fed's 7 November meeting. Indeed, according to the CME Fed Watch Tool, traders are now pricing in zero chance of a 50-bps rate cut, down from around 35% a week ago. A 25-bps reduction is almost warranted, with traders also now seeing a small chance that the Fed will leave rates unchanged.
Meanwhile, the market expects the European Central Bank (ECB) to speed up its monetary policy easing in the months ahead. 25-bps reductions in October and December are now fully priced in as inflationary pressures are easing faster than policymakers had expected. Francois Villeroy de Galhau, the head of the French central bank, recently said that the ECB will almost certainly cut the rates in October as economic growth remains weak, raising the risk that inflation will undershoot its 2% target.
EUR/USD was falling during the Asian and early European trading sessions. The pair has now broken out of its two-month technical range, and the trading bias is now bearish. Today's macroeconomic calendar doesn't feature any major events that might significantly impact the EUR/USD exchange rate, so the established bearish trend may persist.
Australian Dollar Trades Sideways Ahead of the RBA Meeting Minutes
The Australian dollar (AUD/USD) lost 0.69% on Friday due to the strengthening US dollar, as the Nonfarm Payroll (NFP) report data exceeded expectations.
Data released on Friday indicated that the US economy created almost twice as many jobs as expected in September. The data led markets to discount any possibility of another 0.5% rate reduction by the Federal Reserve (Fed) in November.
Given the hawkish comments made by Fed Chair Jerome Powell on potential rate cuts last Monday, there is now zero chance of a 50-basis-point rate cut in rates at the monetary policy meeting on 7 November, down from 35% the previous week. The market anticipates a 25-bps reduction as a baseline scenario. Additionally, Middle Eastern tensions have dampened traders' appetite for risk.
Meanwhile, investors continue to assess the prospects for the monetary policy of the Reserve Bank of Australia (RBA) amid expectations that the regulator may start cutting interest rates later than other central banks. Currently, markets price in an over 70% probability of a rate cut in December. However, the central bank will likely maintain its policy until early 2025 if core inflation remains high.
AUD/USD has been moving within a narrow range during the Asian and early European sessions. The pair is attempting to hold around the 0.68000 level. No major news is expected today, but the RBA meeting minutes will be released at 12:30 a.m. UTC tomorrow. If the RBA's rhetoric is hawkish, it could support the AUD/USD. Meanwhile, dovish statements could bring the pair down towards 0.67000.