Strong NFP and ISM services PMI heighten reversal risk for gold and silver

Markets finally believe hawkish Fed tone after bumper payrolls release

What a week this has been, with central banks taking turns to warn that they could yet push rates further in a bid to combat inflationary forces. Whilst that appeared to initially fall of deaf ears, todays whopping non-farm payrolls beat brought about a realization that the economy appears to be resilient enough to withstand anything the Fed throws at it. The outperformance across the services sector highlighted by the ISM services PMI plays a key role in today’s payrolls figure, with the sector largely providing the bulk of any major NFP move since the pandemic began. With high-paying tech jobs being lost, the services sector has nonetheless managed to surge amid a dramatic rise in new orders.

Without any notable economic collapse, there is little pressure on the Fed to deviate away from their primary goal of bringing inflation back down to target. With that in mind, it comes as no surprise to see the dollar gaining ground to reflect the shift in outlook. The chart below highlights how the US rates remains remain well above those in Europe, with the latest dour UK growth forecasts signalling that we could yet see the BoE shift towards a more dovish position ahead of the Fed if disinflation takes hold.

Gold and silver coming under pressure

The impact of today’s release has been a sharp push higher for the dollar, although those gains have eased a little after the initial pop. However, it is worthwhile noting that the likes of gold and silver continue to come under pressure since this report. A clear pathway towards monetary easing would bring about strength for gold, but that has been stifled today. As such, the breakdown today could bring a period of weakness to unravel much of the strength seen over recent months. Looking at the dollar relationship to gold, we can see that a weaker dollar should be supportive for precious metals. That has been evident of late but highlights the risk of a reversal if the dollar continues to strengthen from here.

Rate cuts will ultimately benefit precious metals

The timing of that interest cut will also be key, with historical trends showing that gold and precious metals really get going at times of monetary loosening. With markets largely expecting that loosening phase down the line, there is no surprise to see markets front-run that move somewhat. The question here is the degree to which markets will buy the dollar and sell gold on the prospect of a slightly longer tightening phase. Precious metals are extremely attractive over the longer-term, but today’s decline points towards a potential retracement phase coming into play after recent gains.

The gold chart highlights how price has slumped through $1896 support, bringing the bullish trend of higher highs and lows to a close. With price subsequently back at the next swing-low of $1868, the ability to break below this point will provide us with information over what comes next. Nonetheless, with the recent uptrend over, it looks likely that we will see a period of downside to take the heat out of this market.

The silver chart looks particularly interesting from the daily timeframe. The descending trendline and 76.4% Fibonacci resistance zone appears to have drawn a line under this bull-market, with the break below $22.76 signalling the likely beginning of a bearish phase. Quite whether this represents a retracement of the recent leg higher from $20.58 or a wider selloff remains to be seen. Nonetheless, today appears to have brought the bears back into play once again for silver.