Gold suffered a significant drop last Monday, but regained some of its losses in the latter half of the week.
Despite closing higher last week, the technical outlook remains bullish.
The Federal Reserve's monetary policy statement and U.S. employment data this week could influence gold's valuation.
At the start of last week, gold (XAU/USD) faced intense bearish pressure, marking the largest single-day drop of the year on Monday. The price of gold managed a rebound in the second half of the week but closed lower. The Fed's interest rate decision and U.S. labor market data for April could drive the price direction of the metal.
Following its sharp decline last Monday, gold successfully held above the $2,300 mark
At the beginning of last week, owing to a relatively calm update on the Iran-Israel conflict over the weekend, geopolitical tensions eased, and gold fell. Benefiting from safe-haven flows and having recorded significant gains over the past few weeks, gold was due for an adjustment, with a daily drop of 2.7% on Monday. The price continued to decline, touching a more than two-week low near $2,290 on Tuesday morning. However, following the release of weak U.S. manufacturing PMI (Purchasing Managers Index) data, the U.S. dollar (USD) faced selling pressure, prompting gold to rise above $2,300 and close nearly flat.
The U.S. S&P Global Composite PMI dropped from 52.1 in March to 50.9 in April. This indicates a loss of momentum in private sector business activity. Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, said, "The PMI survey results suggest that a deterioration in demand and a cooling labor market led to a decline in price pressures, with a welcome slowdown in the rate of increase in prices for goods and services sold in April."
On Wednesday, after the U.S. Census Bureau reported a 2.6% increase in durable goods orders to $238.4 billion in March, the U.S. dollar remained strong against major currencies. Consequently, gold struggled to find momentum for a recovery.
The U.S. Bureau of Economic Analysis (BEA) reported on Thursday that the U.S. GDP grew at an annual rate of 1.6% in the first quarter (preliminary), a significant deviation from the 3.4% growth rate in the last quarter of 2023 and far from the market's expectation of 2.5% growth. As a result, the U.S. dollar weakened, allowing gold to close higher. However, since the GDP report also showed a rise in the GDP price index (also known as the GDP deflator) from 1.7% to 3.1%, highlighting a greater impact of inflation on GDP growth, the rebound in gold was somewhat limited.
On Friday, the U.S. BEA announced that the March Core PCE Price Index year-over-year rose by 2.8%. This figure is in line with February's increase and higher than the market expectation of 2.6%. The U.S. dollar remained strong, making it difficult for gold's recovery momentum to continue into the weekend.
Gold investors shift focus to the Fed's decision and U.S. economic data
The Federal Reserve is set to announce its monetary policy decision on Wednesday. The market expects the U.S. central bank to maintain its policy rate at 5.25%-5.5%. The CME FedWatch Tool indicates that there is approximately a 90% chance the Fed will hold off on any action in June. The Fed is unlikely to hint at any timing adjustments for policy changes in its statement.
However, in the post-meeting press conference, Fed Chairman Powell might be asked about the possibility of a rate cut in June. If Powell doesn't rule out a rate cut in June, the initial reaction could cause U.S. Treasury yields to drop significantly, providing a boost to gold. In March's policy meeting, Powell noted that the strong inflation in January and February might be due to seasonal factors. Market participants will also pay close attention to Powell's comments on the inflation outlook. If Powell expresses concern about recent inflation developments, the U.S. dollar could remain resilient against major currencies, limiting gold's upside potential. Finally, if Powell downplays the weaker-than-expected GDP data for the first quarter, investors might interpret it as a hawkish stance, making it difficult for gold to gain momentum.
On Friday, the U.S. Bureau of Labor Statistics will release the April jobs report. If the Non-Farm Payrolls (NFP) show a significant decline to near 150,000, it could trigger a sell-off in the U.S. dollar. Even though this may not significantly impact expectations for a June rate cut, if investors lean towards the Fed adjusting policy in September, the data could still heavily impact the U.S. dollar. The CME FedWatch Tool shows that the market perceives a near 40% probability of the Fed maintaining its policy rate unchanged in September. Conversely, if the NFP shows a stronger-than-expected increase, especially if wage inflation data released concurrently is strong, it could reinforce expectations of the Fed holding steady in September and lead to a significant drop in gold prices before the weekend.
TMGM Gold Technical Outlook
The relative strength index on the daily chart initially fell to 50 and then climbed to 60 at the start of last week, indicating that the recent pullback was a correction, not the start of a reversal. Moreover, after closing below the 20-day simple moving average (SMA) on Wednesday, gold climbed above this level again, reflecting indecision among bears.
On the upside, resistance lies at $2,360 (a static level), followed by $2,400 (a static level and the endpoint of the most recent uptrend) and $2,430 (the all-time high set on April 12). The downside targets for gold are $2,300 (the 23.6% Fibonacci retracement level of the recent rally since mid-February), followed by $2,280 (a static level) and the 38.2% Fibonacci support at $2,240.
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