It appears that the price of gold (XAU/USD) is poised to record a third consecutive weekly gain after reaching levels of $2170 during Friday’s trading.
This comes amid escalating geopolitical tensions, a decline in US Treasury yields, and increasing expectations that the Federal Reserve is approaching an interest rate cut.
During his two-day testimony before Congress, Jerome Powell stated, “We expect to become more confident that inflation is moving sustainably to 2%.
And when we get that confidence, and we’re not there yet, we will act accordingly.” The markets are pricing in the possibility that the Fed could start cutting interest rates without pushing the economy into a recession, having achieved what is known as a “soft landing” at least so far.
I believe that gold prices will strongly react to the release of the US Non-Farm Payrolls (NFP) data for February today. Strong employment figures in January, coupled with a similar performance in February and steady wage growth, may lead the Federal Reserve to monitor the data for several months before considering an interest rate cut.
This scenario could provide strength to the US dollar in the medium term, supporting an increase in gold prices.
On the geopolitical front, the killing of three civilians aboard a commercial ship in the Red Sea by Houthi rebels has increased the risk of escalating tensions in the region.
From my perspective, the rise in gold prices indicates that cautious comments from Federal Reserve Chair Powell have boosted investor confidence in imminent interest rate cuts. Expectations for a Fed interest rate cut in the June policy meeting remain firm. It is anticipated that the interest rate will remain unchanged within the range of 5.25% – 5.5% in the March and May policy meetings.
Today, the strength of gold prices will be tested by the US NFP data for February. Employers in the United States are expected to add 200,000 jobs, lower than the strong 353,000 jobs added in January. The unemployment rate is expected to remain unchanged at 3.7%.
Hourly income data for February will be of utmost importance to the markets. Economists expect monthly wage growth to decrease to 0.3% from 0.6% in January. Annual wage growth is expected to be 4.4%, slightly down from the previous reading of 4.5%.
An increase in wage growth may slow progress toward the 2% inflation target, negatively affecting market expectations for a Federal Reserve interest rate cut in June. If this occurs, the opportunity cost of holding non-yield assets like gold will increase, impacting the price of gold.
Simultaneously, the European Central Bank (ECB) may ease its policy in its June meeting. While the ECB kept the benchmark interest rate unchanged at 4.0% in its March meeting last Thursday, it lowered inflation expectations for 2024 from 2.7% to 2.3%, suggesting that the central bank is open to potential interest rate cuts in the coming months, possibly before the Fed, which could shift market dynamics.
Chinese investors and the People’s Bank of China have also been purchasing significant amounts of gold as a safe-haven asset amid the downturn in the real estate sector and stock markets in China.
I believe escalating geopolitical tensions in the Middle East are the primary driver behind the demand for traditional safe-haven assets. Therefore, traders and investors will likely benefit greatly from the data released today, finding strong trading opportunities in gold prices.