Market update: gold pullback extends after NFP print rejuvenated the dollar and US yields

Rejuvenated USD and stronger US yields weigh on gold to start the week

Better-than-expected jobs data for November has cooled expectations of large-scale rate cuts in 2024, after the US unemployment rate declined from 3.9% to 3.7%. With the job market maintaining its relative strength, the Fed may have to maintain interest rates at restrictive levels for a little longer than markets anticipated. The ensuing downward revision in rate cut expectations has provided a breath of fresh air for the dollar and US yields which have both moved off their respective lows.

However, with inflation moving in the right direction, tightening credit conditions (stricter requirements for credit applicants and lower demand for credit) and a rise in corporate bankruptcies, the overwhelming narrative across the market is that the Fed will have to cave in and cut rates in support of worsening market conditions. One of the major risk events next week – apart from the obvious central bank meetings – is the US CPI print. A softer-than-expected figure is likely to extend dovish expectations, which could weigh further on the dollar, potentially providing a tailwind for gold prices.

Economic calendar

Gold and dollar extend inverse relationship after NFP

The recent rebound in the dollar and reversal in gold can be seen via the chart below, where the uptick in gold has weighed on the precious metal. Gold prices and the US dollar tend to exhibit an inverse relationship over the longer-term, and can be seen on the zoomed out daily chart.

Gold and the US dollar index

Potential support levels considered ahead of US CPI and FOMC meeting

Gold has started the week on the back foot, following on from where it ended last week. A second major pullback appears to be in the works since the October trough, and now tests the $1985 level of support. It is no surprise that gold prices have eased after spiking to a new all-time-high early in December, and the recent dollar lift has helped extend the sell-off.

Gold is expected to be highly reactive to USD data this week with US CPI and the FOMC meeting the major catalysts. Throw in the ECB to that mix as EUR/USD makes up the majority of the US dollar index and you have a very busy week with a lot to consider.
Should $1985 hold early on, resistance remains at $2010 followed by $2050. The main catalyst for a bullish continuation is if US CPI cools at a faster rate than anticipated.

Gold daily chart

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